A Chocolate Company since inception in 1990 has been largely responsible for satisfying the country's demand for Chocolates and Sugar Confectionery. The plant has various lines producing a wide range of confectionery lik

CS Professional · Governance, Risk Management, Compliances and Ethics · PYQS · June 2023
A Chocolate Company since inception in 1990 has been largely responsible for satisfying the country's demand for Chocolates and Sugar Confectionery. The plant has various lines producing a wide range of confectionery like Éclairs. Toffees, Fudges. Caramels, Hard Boiled Candy and Enrobed Chocolates. These products are available in attractive packaging and premium Gift Boxes making them ideal for gifting as well as for own consumption. Most of the packaging in the Gift Pack segment has been carefully selected to ensure its enduring utility, thereby giving our valued customers an added benefit. The confectionery is produced by experienced personnel under stringent quality control and hygiene standards. State-of-the-art manufacturing facilities ensure products of international quality. The company in its relentless pursuit of quality obtained relevant Certification in April, 2004. The Company, through its uncompromising stand on quality and competitive pricing, has successfully penetrated countries all over the Gulf, the African continent. Asia, Australia, New Zealand, Canada, South Africa, USA and the UK. The principal business processes involved are: Procurement of raw materials and consumables, Production and Quality Control. Distribution and marketing, Inventory Management, Pricing and cost control. Feedback from consumers and redressal systems, Publicity and promotional activities, Investor relations. Recruitment and HR, Finance & Administration. Corporate communications and public relations, Legal and secretarial matters. Maintenance of equipment and other assets, Capital expenditure for equipment and other purposes. IT systems and telecommunications, Transportation and Logistics. Today, manufacturing sector companies like chocolate manufacturing operates in increasingly complex, competitive and global markets. The ability to manage risks across geographies, products, assets, customer segments and functional departments is of paramount importance. The inability to manage these risks can cause irreparable damages. Chocolate company will always face the likelihood of being impacted by uncertain or adverse future events. These uncertainties will have an impact on a company's ability to generate capital and shareholders returns. The company Board expects that management will not only look at where the company may be exposed to risk, but also how these risks can be managed to influence favorable business outcomes. Considering the above, answer the following questions: What do you understand by Liquidity Risk? What are the techniques to control liquidity risk?

Answer & Explanation:

Liquidity risk is the risk that a company will not have enough cash to meet its financial obligations (pay its debts) on time. Liquidity refers to the ease at which an asset can be converted into cash without negatively affecting its market price; the risk arises when a company cannot buy or sell an investment in exchange for cash fast enough to pay its debts. An effective liquidity risk management would include systems to identify measure. Monitor and control its liquidity exposures. Management should be able to accurately identify and quantify the primary sources of the company liquidity risk in a timely manner. To properly identify the sources. management should understand both existing as well as future risk that it can be exposed. Key elements of an effective risk management process should include an efficient MIS system to measure, monitor and control existing as well as future liquidity risks and reporting them to senior management. An effective management information system (MIS) is essential for sound management decisions. Information should be readily available for day-to-day liquidity management and risk control, as well as during times of stress. Data should be appropriately consolidated, comprehensive vet succinct, focused, and available in a timely manner. An effective measurement and monitoring system is essential for adequate management of liquidity risk. Consequently, intends to institute systems that will enable it to capture liquidity risk ahead of time, so that appropriate remedial measures could be prompted to avoid any significant losses. Some commonly used liquidity measurement and monitoring techniques are: Contingency Funding Plans: In order to develop a comprehensive liquidity risk management framework, the company should have way out plans for stress scenarios. A CFP is a projection of future cash flows and funding sources of the company representing management's best estimate of balance sheet changes that may result from a liquidity event. A CFP can provide a useful framework for managing liquidity risk both short term and in the long term. Further it helps ensure that a financial institution can prudently and efficiently manage routine and extraordinary fluctuations in liquidity. Cash Flow Projections: At the basic level the company may utilize flow measures to determine their cash position. A cash flow projection estimates company's inflows and outflows and thus net deficit or surplus (GAP) over a time horizon. Liquidity Ratios and Limits: The Company may use a variety of ratios to quantify liquidity. These ratios can also be used to create limits for liquidity management. However, such ratios would be meaningless unless used regularly and interpreted taking into account qualitative factors. Internal Controls: In order to have effective implementation of policies and procedures, the company should institute review process that should ensure the compliance of various procedures and limits prescribed by senior management.

Topics: Risk Management

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