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CIMA P3 Chapter 1

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Elda Du Toit

on 26 February 2013

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Transcript of CIMA P3 Chapter 1

Major risks an organisation faces Event risks
Cost and resource wastage risks
Organisational risks
Inadequate systems risks
Fraud and employee malfeasance risks
Probity risks Major risks an organisation faces Property risks
Health and safety risks
Trading risks
Physical risk
Trade risk
Credit risk
Liquidity risk Major risks an organisation faces Legal, political and cultural risks
Contractual inadequacy
IT risks
Knowledge management risks Major risks an organisation faces Financial risks
Interest rate
Financial records and reporting
Finance providers Major risks an organisation faces Competitor
Environmental and social Operational risk Things that go wrong in the day-to-day operation of the business.

Companies must look out for:
Internal control inadequacies
Non-compliance with regulations
IT failure
Loss of key-person
Business interruptions Factors impacting on strategic risk Industry/markets
Competitors’ actions
Product life cycles
Inputs with fluctuating prices
Operating gearing
Flexibility of production processes
Research and development capacity
New technology Strategic risk Potential volatility of profits as a result of the nature and type of business operations.

Companies must look out for:
Sources of finance
Aligning business processes to strategy Risk management as strategy Boards of directors need to understand the following:
Risk need to be managed
Speculative risks and opportunities must be managed to the benefit of interested parties
Think of shareholders and their wishes
Some risks need to be eliminated
Risk is part of strategy Risk and return Generally, the higher the possible return, the higher the risk that one is willing to accept.

Risk = Return Risk vs. uncertainty Risk means that the possible outcomes and the probability of occurrence can be predicted to some extent.

Uncertainty refers to a situation where no outcome and probability of occurrence can be predicted. Benefits of risk management Examples of benefits:
Predictable cash flows
Well-run systems
Limitation of the impact of bankrupting effects
Increased confidence of shareholders and other investors Risk categories Fundamental - e.g. pollution
Particular - e.g. to smoke
Speculative - e.g. gambling
Pure - fire to a building Introduction to Risk CIMA Text Chapter 1 Review Question 1 in the exam bank at the end of the book Major risks an organisation faces Investment risks
Which cost of capital to use
Use of total NPV
Inappropriate time horizon
Data problems
Alternative scenarios
Strategic issues and risk What is risk? Risk is a condition in which there exists a measurable variety in the possible outcomes from any activity.

In other words, the possibility that actual results will differ from what is expected. PEST(EL) Political
Legal Reputation risks
Poor customer service
Failure to innovate
Breaking the law
Poor corporate governance
Poor environmental and social performance
Poor ethics Major risks an organisation faces
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