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RSK4801 ASSIGNMENT 04

Instructions:
- Please use Ariel 12 font and 1.5 line spacing to answer all the questions.
- Draw the diagrams where requested.
- Include page numbers on the document and answer the question in sequence.
- All work should be referenced, including the prescribed textbook and insert a
reference list at the end of your document. Please do not use Wikipedia as a
reference as this is not an academic source.
- Submit your work to Turnitin before submitting the assignment on myUnisa.
- Attach your Turnitin similarity index percentage at the end of the assignment
document.

Section A:
Consider the scenario and answer ALL the related questions.

Scenario
The cement industry in South Africa is currently undergoing mixed sentiments by
various economic and financial specialists. From an economic perspective, this industry
should grow, especially in view of the growing property markets. There are several
initiatives surrounding new housing and shopping complexes across the country, which
is ensuring a growing market for building cement and related products. There are also
opportunities to develop cement production facilities in African countries such as
Ethiopia, Zimbabwe, Botswana and Rwanda. From a financial perspective, there seems
to be a growing (bullish) trend in cement shares; however, this market might be
influenced by cheap importers of cement from other countries such as Pakistan.
Notwithstanding, it seems that this market will show a steady increase in the future,
providing local and foreign investment opportunities. Due to these potential views of the
cement market, there might be ample work opportunities, including for small and
medium enterprises (SMEs).

In this regard, Mr Baloyi decided to investigate an SME to provide ready mixed cement
to builders. He is aware that all SMEs are subject to specific risk exposures. As such, it
is essential to determine if such an investment would be worth the risk. As a risk
specialist, he approached you to analyse the following business and make
recommendations.

Open Rubric
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The business involves the use of cement mixing trucks to provide ready mixed cement
to builders for building purposes. To start such a business, it is imperative to get a
licence from the appropriate government department and be a registered supplier of this
product and service. Due to the price of these cement-mixing trucks, it will be an
expensive business to start. The cost of one truck is R1.5m, and usually, two trucks are
required to start such a business. It is also imperative to confirm a customer base to
ensure that there is a market for the business. This would mean a detailed marketing
campaign to advertise the business and to establish a customer base. The cost for such
a campaign will amount to R500 000 and after that R50 000 per annum (This will only
come into effect the second year after establishing the business). Furthermore, it is
crucial that the business must have skilled employees. Firstly, skilled to ensure that the
mixed cement consists of the correct volume of sand, stone, cement and water.
Secondly, the drivers of the trucks must be trained and have a special license to drive
these trucks and thirdly have the skill to operate the mechanics of the truck’s mixing
machines. Training is thus, essential to ensure a successful business. The average
training cost per employee will be R65 000, which will include the required license fees.
In order to operate two cement trucks, the following staff members are required with an
annual compensation package:

2 x truck drivers R470 000 per driver

2 x machine operators R350 000 per operator
2 x Cement mixing specialists R225 000 per specialist
1 x Administration officer R300 000

To employ the above staff members, it is required that the total annual compensation
must be available upfront in order to protect the employees for at least a year should the
business fail.

The trucks require a maintenance service after 20 000 km. A normal service costs
approximately R8 500 and the average distance per month for a truck is about 10 000
km. To ensure that the trucks operate at their full capacity, these maintenance services
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are crucial. Should a truck break down, it will cause a major problem for Mr Baloyi in the
sense that he will incur penalties for not delivering cement on specified times.

One truck can provide three loads of cement per day which will ensure a net income of
R16 000 (after the cement, sand and water costs). Mr Baloyi envisaged that he would
provide cement for only 20 days per month, which will allow him time for the
maintenance of the trucks on a monthly basis. The building industry closes during the
months of December and January each year, meaning that there are only ten months
available for business.

A potential problem that Mr Baloyi will face is the availability of cement which could be
influenced by strikes at the cement factories. As such, Mr Baloyi must make provision
for these incidents should they occur. Another potential threat to this business is the
exposure to road accidents involving the trucks. Since the trucks form the basis of this
enterprise, Mr Baloyi must be insured against accidents. This is also essential to cover
any third party claims against the business such as the non-delivery of cement as per
agreed times as well as claims from other accident victims. Potential monthly insurance
premiums are:
 R5 500.00 per month (12 x months) per truck (including third party costs) for
accidents.
 R2 500.00 per month (12 months) to insure against claims for non-delivery.

The availability of skilled and trained drivers on these cement trucks are scarce in South
Africa and should one of the drivers fall ill, or want to go on leave. Mr Baloyi will have a
serious problem to achieve his business objectives. Furthermore, the availability of
diesel could be a problem if the country experiences a shortage. This is a high
possibility which could also negatively influence the business. The safety of the trucks
also requires attention, and they must be parked in a safe environment when they are
not in use. In this instance, Mr Baloyi will have to rent buildings with adequate parking
facilities and office space. These rental costs (including water and electricity) for a
suitable building is R20 000 per month. Security is also vital to safeguard the
equipment, which will cost R6 500 per month (including a 24-hour security guard) and
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rapid response from ABS Security. It is also imperative to ensure that there is a process
to clean the trucks when not in use to ensure the longevity thereof. In addition, the
trucks must be monitored in terms of its fuel usage; the oil services and the kilometres
travelled to ensure that the trucks are serviced when it is due. It is therefore imperative
that those above be technologically supported. A system for the business will cost
R50 000 and R2 000 per month.

Due to the fact that the trucks make use of the public roads, it is eminent that the drivers
are exposed to traffic fines resulting in possible legal action against the business. This
should also be adequately addressed during the business strategy.

Mr Baloyi envisaged that to make the business worth his while, he must, at a minimum,
receive a monthly income, before tax, of R90 000. The total tax implications for the
business can be calculated at 28% on the gross income per annum. To ensure the
continuity and the growth of the business, a minimum annual amount of R1 000 000
must be invested. Should this target not be achieved, the business will not grow and go
bankrupt after five years (this is also the lifetime of the trucks and must be replaced
after five years).

To start the business, Mr Baloyi is prepared to invest R5 000 000 into the business for
ten years at 5% interest per year. The monthly amount for this loan is R67 870.

Question 1 (10 x Marks)

Calculate the income (including the original loan) and expenditure for the first year to
determine if the business, from a financial perspective, is worth the risk for Mr Baloyi.

Question 2 (12 x Marks)

Identify and discuss four inherent operational risk factors in terms of the business
exposures and potential consequences that Mr Baloyi will face according to the
business strategy. Explain possible mitigating measures that can be taken to
minimise/eliminate the risk (The maximum length of your answer should be one page).
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Question 3 (8 x Marks)
3.1 Evaluate the identified operational risk factors in terms of the scales below and
determine the probability of the inherent risk (before the control measures):
(4 marks)
Likelihood scale: Likelihood of the event occurring:
1 – Unlikely
2 – Likely
3 – Highly likely
Impact scale: Potential impact of the risk event
1 – Low impact (not serious)
2 – Medium impact (Injuries)
3 – Catastrophic (Serious injury/death)

3.2 Determine the residual risk after the implementation of the control measures, using
the same scale mentioned above. (4 marks)
You can make your own assumptions regarding the ratings and clearly represent
this information in a table format for both questions.

Question 4 (12 x Marks)

4.1 Explain the use of a typical risk map in terms of the four quadrants and the possible
decisions that can be taken. (4 marks)
4.2 Plot the inherent risks identified in question 3 on the map and briefly explain the
reasoning behind the position of each risk. (8 marks)
(You can make your own assumptions where necessary)

Section B:
Answer ALL the questions (These questions are not related to the scenario)

Question 5 (20 x Marks)

With reference to the generic operational risk management framework, discuss how
operational risk management methodologies can be used for effective risk reporting.
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Illustrate your answer with appropriate examples. (The maximum length of your answer
is one and a half pages).

Question 6 (8 x Marks)
The aligning of the risk appetite with the business strategy is an integral part of setting
the operational risk appetite, and therefore, vital that it is driven by top management.
Briefly discuss the role and responsibility of top management in terms of setting a
realistic operational risk appetite. (The maximum length of your answer is 1 page).

(TOTAL 70 MARKS)

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