Sample Research Proposal on THE IMPACT OF OPERATIONAL RISKS TO THE COMPANY’S VALUE

Introduction Business risk is related to operating features of a firm while financial risk is related to the strategies behind the capital structure of a firm.  The former is a type of risk that is outside the control of firms and hardly affected by certain tactics and strategies because business risk is very dynamic and uncertain.  On the other hand, the latter involves factors within the scope of managerial control because it arises from borrowed funds the company is bound to pay unlike equity funds.  However, they are both under the definition of systematic risk or inherent risks of companies that cannot be reduced by diversification strategies.  Business risks includes example such as the sensitivity of competitive structure of an industry to changes in macroeconomic variables such as inflation and interest rates.  On the other hand, the more debt a firm has a greater level of financial risk or inability to meet such obligation.   Research Problem             Operational risks are not significant to large companies especially those operating in a global scale because they have economies of scale, scope and depth of internal financing.  However, small businesses in manufacturing industry are confronted with business failure in cases where operational risks are not immediately addressed.  They are vulnerable to environmental changes such as fluctuating demands, change in prices of raw materials and regulations in international markets.  As a result, this research will try to find current issues in the global operations of small and medium enterprises (SME) where operational risks can affect their business success.  It will also try to recommend solution on how to improve operations and financial position to prevent adverse effects of recurring operational difficulties and risks.         Research Objective To identify types of operational risks of SMEs To evaluate the internal capabilities of SMEs in dealing with operational risks either actually experienced or not To recommend solutions on how to minimize operational risks    Literature Review Why companies should avoid bad debts and bank balance instability while improving its cash flow as well as controlling its bank balance and operational costs?  This will be addressed by mentioning cash conversion cycle.  Cash conversion cycle or CCC is equal to the sum of average inventory days (AID) and average debtor days (ADD) less average creditor days (ACD).  In the financial parlance, it represents the amount of time (e.g. days) in which the corporate cash is tied-up or freeze caused by the slack time between the payment of inputs for production and acceptance of end-user payment for the finish product (Mcmenamin 1999 p.636).  Within such slack time, the firm must have sufficient cash to keep day-to-day operations (e.g. converting inputs to outputs) otherwise it would halt operations or may lead to total shut down.               As an illustration, a company has a cost of sales totaling $1,206 while AID, ADD and ACD are 62, 46 and 75 days respectively.  In this case, CCC is equal to 33 days which means that the business must have sufficient funds available within this gap or it cannot continue to operate.  The demanding component is that sufficient funds should be at least equal to $109 ($1,206/ 365 days)*33 days.  This is where the importance of having minimal bad debts, stable bank balances, improved cash flow and manageable operational costs can be appreciated.  For example, a company can maintain stable bank balances to avoid charges or avail credit lines which undoubtedly a big help in times when CCC is too long.  This is especially true at times of low product demand or productivity (high AID), piling of bad debts (high ADD) and demanding suppliers of either capital or raw materials (low ACD).                In relation to objective 1, holding AID constant, reducing payment term of customers (note: this represents ADD) and increasing payment term of suppliers (note: this represents ACD) can lower CCC.  When this happens, increase in cash flow will likely ensue because cash inflows have faster rate than cash outflows (Investor Words 2006).  However, as long as the underlying amount of cash outflows exceed those of cash inflows, cash flow as a measure of a company's financial health is not secured.  For example, ADD may only be 30 days while ACD can go as long as 90 days but the ACD are intended to pay interest payments from long-term loans and settlement of some principal amounts.  In this case, face value of cash receivables and cash payables will dictate the effectiveness in the change of payment term.     Cash flows are the lifeblood of a corporation and inability to maintain in a manageable level will lead bankruptcy (Cook, Hay & Rujoub 1995 pp. 75+).  This admonition is supported by their study and found that cash flow is a more superior measure to predict bankruptcy than accrual accounting.  As a result, for beneficial change in payment term, the company should keep separate cash and accrual records.  This is especially significant as accounting policies are changed and the previously profitable companies that have substantial cash flows were tamed due to policy changes.  As long as every cash flow decision is indeed analyzed within the boundaries of real cash assets, changes in payment term will continuously beneficial on its part.  Non-cash transactions such as deferred taxes or depreciation are excluded from analysis.  The potential cash flow increases will easily be reflected by actual cash flow increases from beneficial change in payment term.   Cash flow is equal to the sum of operating profit and depreciation plus or minus other non-cash transactions (Mcmenamin 1999).  This means that cash flow is actually a measurement of a firm's capability to generate cash asset and is the true test of the firm's performance and long-term survival and growth.  On the other hand, cash flows are not really free which give rise to measurement of free cash flows (FCF).  FCF is the real cash flow a company has after making necessary investments in fixed assets, distribution of dividends and tax payments (Mcmenamin 1999).  As observed, either free or tied cash flows are concern, it is necessary for a firm to continuously increase its cash flows because they are not only used for day-to-day expenses but can also be utilized for other significant costs if cash flows are fairly substantial.                      The basis of having bad debts is embedded in game theory by which the debtor's best strategy is to default (Gamble 2003 pp. 54+).  Bad debts are accounts receivables that remain uncollected which make them written-off as expense reducing the income statement account (Investorwords 2006).  In the contrary, most companies proactively implement their course of action to minimize the effects of bad debts by using historical accounts and estimating necessary adjustments however in balance sheet's accounts receivables (e.g. they are non cash transactions).  As a result, bad debts have minimal adverse effect to cash flows which ultimately indifferent to a step in executing beneficial change in payment term.                          However, this may not be the case as there are a number of companies that set aside reserves against the probability that their debtors will not pay in full (Investorwords 2006).  With this, cash flows are tied-up as bad debt reserves and consequently leading to an adverse CCC scenario (e.g. longer cash conversion days and bigger required standby fund).  For illustration, the agricultural products giant Monsanto had a net income way back in 2002 of $147M compared to a much better performance in 2001 with $389M net income (PR Newswire 2002).  The primary catalyst for decline in performance was cited to be the excessive bad debt reserve amounting to $100M.    Conceptual Analysis Business Industry Business Entity Operations External Environment Customers   The figure above shows the interaction of a business entity with its internal and external environment.  Since a strategy can be triggered by competition, industry standards, government policy and employee motivation, these four aspects of a business is crucial to its success.  In effect, using analogy, this constitutes the basic framework of a business decision-making analysis.  Specially, this framework will identify the advantages and disadvantages of operational risks for business.  For customers, a business may be adversely affected when low-income consumers may be distracted with the price at peak times in which innovation costs are too high or levies for the exported products are too high.  It will lead to loose in sales and therefore policymakers and other factors must be able to explain to this to the businesses the rationale behind any adverse changes in the environment.    The same analogy is applicable to competitors between businesses that are competing in the same market.  The location advantages (e.g. the presence or absence of strict regulations of products within the area) can increase the profitability of those outside it or in nearby areas and lower the profits of those within it.  In effect, business industry is not severely affected rather only those in minority.  For business operations, logistics companies or even those with business establishments that delivers the products may produce additional cost due to stricter regulation.  Lastly, increase in taxes and economic recession may deepen the problems of business within the area if stricter regulation is implemented.        Methodology The research will be conducted using mostly secondary sources.  This, however, will be done on with no statistical measures due to location disadvantages and reasons of practicality.  Voluminous research will be applied to electronic data to view journals which will be the source of FDI-related knowledge and also data on exportation.  International- and specific government-sponsored of known credibility will be used to support and verify findings.  Newspapers will serve as reference to view current conditions in global economy.  Most part of the research will be given to fact finding and analysis.  The researcher should be able to present the findings of the research in an analytic way as to dispute credibility of a certain source and possible implications to conclusions.                It should be noted that there are countries that are closed with minimal media rights.  Political power and influence is so strong that data available would be manipulated.  This gives the disincentive, and subsequently, challenge to the researcher to locate the most credible and relevant evidence pertaining to the country indicators.  If possible, actual geographical observation would be necessary to support secondary evidences with personal experience like what Anne Peck did.  In addition, economic growth is a broad subject to study that makes it useful to specify areas to consider.  But it will also form parts of the intended literature review.                The research would have been ended right after unlocking FDI concepts and relate them to any economy in question.  However, this research will tend to identify the weaknesses of FDI knowledge when applied to global economy possibly on the implications of "suspicious" free-market conditions.  The researcher should be able to classify the data and analyze them to come-out to the most prudent conclusions applicable to this specific economy.  In the onset, the time-frame to be dedicated on identifying the applicability criteria of FDI and exportation concepts to global market can be substantial.  In this view, the researcher may coincide or even create new way of analyzing findings.  On the other hand, the focal point should be implications of the findings to global economy and business operations.