Financial Risk Essay Example | Topics and Well Written Essays - 2250 words

Financial Risk - Essay Example Both companies have carried out work in Africa, Asia, Australia, the United States and other parts of Europe. The company operates from offices in the UK and Spain and focuses on the development of residential properties. In the UK the company operates from 24 regional offices across England, Scotland and Wales (Taylor Wimpey 2011b). Over the years, the company has built a wide range of properties from one and two-bedroom apartments to five bedroom detached houses. In addition to its UK and Spain construction business Taylor Wimpey also operates two other businesses - Prestoplan and Taylor Wimpey Logistics (TWL). Prestoplan is the company’s timber frame solutions business which allows for the simplification of on-site construction while TWL is its supply chain logistics business that sources materials in bulk from suppliers ‘just in time’ for carrying out construction (Taylor Wimpey 2011c). The industries in which Taylor Wimpey competes include residential constru ction contractors, the construction sector, and residential real estate development (Hovers 2011). The company’s main competitors are Bellway plc which is located in Newcastle Upon Tyne in the UK and The Berkeley Group Holdings plc in Cobham, Surrey. 2.0 Financing Decisions According to Edum-Fotwe et al (1995) the construction industry in the UK has always experienced a high level of insolvencies when compared to other industries. One of the main causes of this is the improper use of cash resources (Chen et al 2010). It is therefore important that regular performance evaluation be carried out in order to determine the strategies to use in order to ensure survival. Financial analysis using a number of ratios therefore becomes important. Liquidity and solvency ratios look at the ability of a firm to pay to meet short-term and longer-term financial commitments as they fall due (BPP 2009). Financing decisions will affect Taylor Wimpey’s financial risk 2.1 Financial risk Ac cording to Holton (2004) risk as it is commonly used refers to both exposure and uncertainty, neither of which can be defined operationally. There are many different types of risk. However, this paper looks at financial risk. Financial risk is the risk that is associated with debt financing. This synonymous with Gabriel and Baker (1980) definition which states that financial risk is ‘the added variability of the net cash flows of the owners of equity that results from the fixed financial obligation associated with debt financing and leasing.’ It also involves the ‘risk of cash insolvency’ and has been extended to include the risk of not being able to fill obligations in relation to prior claims with the cash that the business generates Gabriel and Baker (1980). A firm’s ability to meet its obligations is determined by the level of its fixed obligations as well as its liquid resources (Gabriel and Baker 1980). It is the risk that a company will not be able to meet its financial commitments due to insufficient cash flows. It is the additional risk that shareholders face when debt is used in addition to equity capital. Financial risk arises as a result of various transactions of a financial nature including legal transactions, new projects, mergers and acquisitions, debt financing, and through the activities of management, stakeholders and competitors (Horcher 2005). Financial risks are associated with both short-term and lon