International expansion (operations)
The expansion into Farland introduces a risk in that the company will be managing operations in a
foreign country for the first time. Farland is remote, so it may be difficult for xx Co’s management
team to visit new operations regularly which means controls could be difficult. In addition, Farland
may have different laws and regulations, so there is a heightened risk of non-compliance. These issues
may affect operations in the home currency of xx Co and give negative effect to cash flow.
Expansion plans (for listing)
The expansion plans could take management’s attention away from running the business, thus
management controls over the existing operations could deteriorate, especially for the possible future
flotation. In order to make the expansion and flotation successful, management could be pressured to
make unwise decisions for short-term profit only and increase spending, which will impact
significantly on the company’s cash flow.
Business expansion
● Whether therer will be an appropriate return of the investment (要提及具体⾦额，并计算当前投
资占总资产的⽐例)
● 还有可能影响公司的gearing (financial risk)
High annual expenditure (R&D, capital expenditure, maintenance)
● Will give pressure to cash flows and profit margin. (要提及具体⾦额)
E.g.
Capital expenditure and maintenance requirements
The company’s success relies on gyms being equipped with modern equipment and the other facilities
such as tennis courts being maintained to a high standard. This requires a high annual expenditure, for
example, this year $12 million has been invested in the gym equipment and $5.5 million has been
incurred on maintenance and repairs. Such high annual expenditure is a big drain on cash, and the
company could face liquidity problems if cash inflows from customers are not maintained.
Competition and marketing expenses
The industry is competitive, which itself is a business risk, meaning there is high pressure on the
company to maintain its market share and customer base, so the company has to spend a lot on
marketing to support its brand. This year, $8.5 million has been spent on marketing, which equals to
16% of revenue. This is a huge drain on cash and will impact significantly on the company’s liquidity
position.
Luxuary product
Sensitive to economic problems; any decline of demand will impact on profitability and cash flows.
xx accreditation/licenses (not to be renewed)
There is a risk that the xx accreditation may not be renewed, with implications for reputation, and more
specifically, for the new contract with xx Co, which largely accounts for an increase of 5.5% in the
company’s revenue this year. (In addition, the Gold Standard is linked to ethical business practice, and
that the legal case claimed by employees and the incentive payment made to a government official may
indicate that the company’s business ethics are questionable.) If the xx accreditation is lost, xx Co and
other customers may cancel contracts, resulting in a loss of revenue and cash flows.
Highly regulated industry
E.g.
Health and safety regulations
The company operates in a highly regulated industry, and the risk of non-comliance with various laws
and regulations is high. If the company is found to break relevant regulations, its operating license
could be revoked, which would have reputational consequences and could also decrease revenue and
ultimately impact on the company’s going concern status.
Damage to assets/inventories (caused by ...)
● E.g. weather conditions
The recent storms have caused significant damage to the company’s timer plantattion asset.
Unpredictable weather patterns could cause further harm or even totally destroy the company’s timber
platations. If so, the company would face a significant depletion of its future cash inflows and also bad
reputation for lack of timbers (inventories).
Legal case
The legal action against the company by xx (e.g. its own employees) is a significant risk. If the issue
becomes public knowledge, there will be reputational problems, and the amount which is being
claimed, $xx million, exceeds the company’s cash balance. (⽐较cash balance) All these would give
negative effect to cash flows and even affect the Pale Co’s going concern status. (going concern)
Liquidity
The financial information provided indicates that the company’s liquidity position has deteriorated over
the year. The company has only $4.5 million of cash - a reduction of 33.8% compared to the end of the
last financial year while the company is at the limit of its bank borrowing agreements. What’s more,
the international expansion, legal sue issues discussed above would make Pale Co’s liquidity even
worse.
Incentive payment
The fact that the payment is being reported in the media indicates that there is something unusual about
the payment and, in fact, the incentive payment could be a bribe. This may cause reputation problems
which may affect the related sales, and if the incentive payment is proven to be a bribe, it has very little
cash available to pay any fine or penalty imposed.
Liquidity and overtrading
The company’s cash position is projected to deteriorate significantly, with the level of cash falling from
$5.6 million to $1.4 million in the year, which has decreased by 75%. At the same time, revenue and
profit before tax are both projected to increase, by 17.8% and 50% respectively. These trends could
indicate that the company is expanding too quickly and overstrading, focusing on generating revenue
rather than on managing cash flows appropriately. This is particularly concerning given the company’s
plans for further expansion in the next few years.
Internal control
● Corporate governance
The company lacks an audit committee and the internal audit team is small and lacking in
independence as they report directly to the finance director. This could lead to deficiencies in controls
and inefficiencies in business operations as well as having a negative impact on management’s ability
to monitor the company’s performance.
● New data management system
Introducing a new data management system can create a business risk in that insufficient training may
have been provided and appropriate internal controls may not have been designed or implemented in
relation to the new system, increasing the risk of inaccurate recording, processing and reporting of
information. This would have a negative impact on management’s ability to monitor the company’s
performance.