Page 49 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes Inflation Rate Risk: Inflation may be demand pull or cost push inflation. In demand pull
inflation the demand for goods and services are in excess of their supply. At full employment
level of factors of production, the economy would not be able to supply more goods in the
short run and the demand for products pushes the price upward.
The cost push inflation as the name itself indicates that the inflation or the rise in price is
caused by the increase in the cost. The increase in the cost of raw material, labor and
equipment makes the cost of production high and ends in high price level. The cost push
inflation has a spiraling effect on price level.
Unsystematic Risk: It is unique and peculiar to a firm or an industry. Unsystematic risk stems
from managerial inefficiency, technological change in the production process, availability of
raw material, changes in the consumer preference, and labor problems. The nature and magnitude
of the above mentioned factors fifer from industry to industry, and company to company. They
have to be analyzed separately for each industry and firm. The changes in the consumer preference
affect the consumer products like TV, washing machines, refrigerators more than that of consumer
product industry. The nature and mode of raising finance and paying back the loans, involve a
risk element. Unsystematic risk can be classified into
Business risk
Financial risk
Business Risk: It is that portion of unsystematic risk caused by the operating environment
of the business risk arises from the inability of a firm to maintain its competitive edge and
the growth or stability of earnings. Variation that occurs in the operating environment is
reflected on the operating income and expected dividends. The variation in expected
operating income indicates the business risk. Business risk is further divided into external
business risk and internal business risk.
Internal business Risk: It is associated with the operational efficiency of the firm. The
operational efficiency of operation is reflected on the company’s achievement of its
pre set goals and the fulfillment of the promises to its investors.
Fluctuations in the sales: The sales level has to be maintained. It is common in
business to lose customers abruptly because of competition. Loss of customers will
lead to a loss in operational income. Hence the company has to build a wide customer
base through various distribution channels. Diversified sales force any help to tide
over this problem.

Research and Development: Sometimes the product may go out of style or become
obsolescent. It is the management, who has to overcome the problem of obsolescence
by concentrating on the in house research and development program.
Personnel Management: The personnel management of the company also contributes
to the operational efficiency of the firm. Frequent strikes and lock outs result in loss
of production and high fixed capital cost. The labor productivity also would suffer.
The risk of labor management is present in all the firms. It is up to the company to
solve the problems at the table level and provide adequate incentives to encourage
the increase in labor productivity. Encouragement given to the laborers at the floor
level would boost morale of the labor force and leads to higher productivity and
less wastage of raw materials and time.

Fixed Cost: The cost components also generate internal risk if the fixed cost is higher
in the cost component. During the period of recession or low demand for product
the company cannot reduce the fixed cost. At the same time in the boom period also
the fixed factor cannot vary immediately. The high fixed cost component in a firm

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