Discuss methods that could be applied at BFC to identify and evaluate BFC’s exposure to loss.

Assignment Brief

Task Borrow Furniture Company (BFC) is a medium-sized chain of retail and wholesale furniture stores in the UK. Mr Collins is the area risk manager of BFC and his duty is to identify, assess, and manage the potential risks that may adversely affect the sales, safety, security, and financial health of the organisation. It is widely accepted that an organisation should define and identify all types of risk that an organisation faces, set the amount of uncertainty that an organisation is willing to take, implement effective risk control measures to reduce the impact on risk, and transfer unwanted risks to limit loss exposure. While identifying the main financial risks facing the furniture stores, Mr Collins is also aware of other risks that may cause severe business disruptions and subsequent loss of revenue. In practice, he is also aware that it could be very difficult to identify and analyse the overall risk faced by his organisation. Mr Collins intends to assess the various types of risk in order to prioritise which risks should have a formalized risk management procedure, which will include the probability of occurrence and the severity of potential loss. Insurance is regarded as the most well-known way of handling risk. However, Mr Collins is not convinced that the purchase of insurance is the most effective and economic way of managing risk. You are required to critically discuss the following issues in your report.

1. Discuss methods that could be applied at BFC to identify and evaluate BFC’s exposure to loss. (15%)
2. Discuss the relevance of risk management philosophy and discuss whether incorporating such a philosophy at BFC will benefit the company in the long run in meeting corporate objectives. (20%)
3. Discuss the rationale of risk retention and the positive and negative effect of risk retention on BFC. (25%)
4. Advise Mr Collins on how to efficiently and effectively use insurance as a method of transferring risk and critically evaluate whether insurance is the most effective method of managing risk. (25%)

Sample Answer

Risk Management at Borrow Furniture Company (BFC): A Critical Discussion

Borrow Furniture Company (BFC), as a medium-sized retail and wholesale chain in the UK, faces an array of risks that may disrupt its sales, safety, security, and financial stability. Effective risk management is therefore crucial not only to protect the organisation from losses but also to ensure sustainable long-term growth. This report critically evaluates the methods available for identifying and evaluating BFC’s exposure to loss, the role of risk management philosophy in achieving corporate objectives, the rationale for risk retention, and the role of insurance as a means of transferring risk.

A starting point in assessing risk exposure at BFC lies in the identification and evaluation of potential losses. Several methods can be deployed, including risk mapping, scenario analysis, and statistical modelling. Risk mapping allows the company to categorise risks according to probability and impact, enabling the prioritisation of high-severity threats such as supply chain disruption or store security breaches. Scenario analysis provides insight into how various internal or external events, such as a sudden decline in consumer spending or a disruption in raw material supply, might affect BFC’s operations. Meanwhile, quantitative tools such as statistical modelling and historical loss data analysis provide a more empirical basis for anticipating financial exposures. Each method offers unique benefits, and their combined use strengthens BFC’s capacity to predict and manage risks comprehensively.

Incorporating a risk management philosophy is equally significant. Risk management philosophy refers to an organisation’s overarching attitude towards uncertainty, resilience, and risk-taking. Embedding such a philosophy at BFC ensures that risk awareness permeates all levels of decision-making, aligning risk management with corporate objectives. In the long run, this contributes to a proactive rather than reactive stance, encouraging staff and management to anticipate potential threats and mitigate them in advance. Moreover, adopting a well-structured philosophy enhances stakeholder confidence, as it signals that the company is committed to sustainability and stability, rather than short-term gain.

Risk retention also warrants close analysis. The rationale behind retaining risk lies in the recognition that not all risks can, or should, be transferred or eliminated. In some cases, retaining certain manageable risks may be more cost-effective than purchasing external protection. For BFC, this could apply to relatively low-severity risks such as minor inventory damage or operational inefficiencies. The positive impact of risk retention includes the potential for cost savings and the promotion of a culture of accountability, as managers become more engaged in actively controlling retained risks. However, there are also negative implications: excessive reliance on risk retention exposes the firm to significant losses in the event of miscalculated probabilities or underestimated impacts. Therefore, risk retention should be balanced and strategically applied only where financial resilience and contingency planning exist.

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