Page 216 - RISK Management IC 86

Risk Management

(i) losses suffered by one division may be covered
by borrowing from central funds.

(ii) random loans may be obtained from external
sources

(iii) contingency loans may be arranged in advance
of losses occurring.

The dangers of relying on internal funds may have the
following dangers (a) non-availability of funds at the
required time and (b) non-liquidity of funds at the
required time. Also, if results are to be used to finance
losses some desirable investment opportunities may have
to be forgone.

Dependence on raising loans when losses occur is equally
dangerous. After a loss the value of the organisation's
assets diminishes and demand for cash increases. Even
if its gearing ratio is low and it can offer good security,
the urgency of its needs may force it to accept a loan on
disadvantageous interest or repayment terms. An
organisation with a low credit standing before a loss
may not be able to get any loan on its terms.

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