Business Risk

ASSIGNMENT 2. BUSINESS RISK

1. How does a business know how liquid its assets are?

Companies should check the market to know how liquid their assets are. This will give them an idea of which assets can be sold, how quickly it can be and at what price. This analysis should be done continuously because the market is in continuous changes and assets that are liquid today will not be tomorrow or their value will be trading lower.

2. What factors may affect how the liquidity of an asset changes over time?

• Economic conditions affect directly the assets liquidity, when economic is in recession the public are not willing to buy and most assets lost its liquidity.

• How deep the market is, also affect the asset liquidity; a traded asset in a deep market is more liquid because there are more public willing to buy and sell.

• Market changes; a continuous or significant drop in a company’s share price comes with short buyers (less liquid) and loss of value.

3. How does installing credit limits for clients reduce a business’s credit risk?

Credit limits are an effective way to reduce credit risk; credit limits are installed before a carefully analysis of clients’ creditworthiness (after check cash flows or assets and liabilities), this information gives a clear idea of how much the client can borrow and will be able to paid without default.

4. Operational risks can be split into internal and external risks. How can managers mitigate external risks? How can managers mitigate internal risks?

Managers can mitigate external risk through insurance policies, these policies cover any external eventuality and companies only have to pay a small premium to be totally covered. Additionally, companies should consider to have a backup place where they can run their business if something happen, this will help them to avoid stoping operations at all.

Also Managers can mitigate internal risk having specific procedures for each work position, this help the employees to do the job in a