MGMT 8605M Week 3 Risk Register Entry Example

One Customer Holds 31 Percent of the Receivables: A Risk Register Entry for a Snack Manufacturer Written So a Colleague Could Update It Next Quarter From the Sources It Names, With Ordinal and Dollar Ratings Side by Side

Student Name

Walden University

MGMT 8605M: Financial Risk Management and Decision Making for Organizations

Instructor Name

Month Day, Year

One Customer Holds 31 Percent of the Receivables: A Risk Register Entry for a Snack Manufacturer Written So a Colleague Could Update It Next Quarter From the Sources It Names, With Ordinal and Dollar Ratings Side by Side

The Entry

[after]

The entry belongs to the register of Kittredge Snacks, a composite maker of kettle chips and pretzels in Pennsylvania with annual sales of about $210 million.

Table 1

Risk Register Entry FIN-07, Customer Concentration in Receivables

One Event per Statement

The statement follows a cause, event and consequence form. The cause is concentration: one chain buys about 28 percent of Kittredge's output and, because it pays on longer terms than other customers, holds 31 percent of receivables, about $8.1 million at the last month end. The event is either a downgrade of the chain's credit rating, which would signal a risk of nonpayment, or a slowdown in its payments to 60 days beyond terms, which large retailers have imposed on suppliers before. The consequence is stated in dollars over a period: a cash shortfall of about $5.4 million against plan within the quarter, the amount of the chain's receivables that would fall due and go unpaid in a 60-day slowdown. Combining two events in one statement would usually be a mistake, but here both reach the company through the same channel, cash not received from one customer, so the consequence is the same.

An Owner Who Can Reach the Data

The owner is the corporate controller, named by role rather than by person so the entry survives staff changes. The controller runs the receivables aging report each month and receives credit rating alerts, so the owner can update the metric without asking anyone. Assigning the entry to the sales director, who manages the customer relationship, would have given it to someone with influence over the exposure but no direct access to the figures.

A Threshold With Its Reason

Each threshold has a stated reason. A 35 percent share is the level at which a full 60-day slowdown would exceed the company's undrawn credit line after its minimum cash balance. Days sales outstanding above 50, compared with 38 now, would signal that the slowdown has begun. A rating downgrade is included because it usually precedes payment changes rather than following them.

Ordinal and Quantified Side by Side

Kittredge rates each entry from one to five on likelihood and on impact, and the board's risk committee reads the results as a heat map. Cox (2008) showed that such risk matrices can mislead: they can give the same rating to risks whose expected losses are far apart, and occasionally rank a smaller risk above a larger one, because the coarse categories hide magnitudes. Hubbard (2009) made a similar argument about scoring methods in general. The entry therefore gives the dollar shortfall beside each rating. A reader who sees impact 4 can check that it stands for $5.4 million, and can compare it directly with other entries whose dollar figures differ even when their ratings match.

Controls and the Residual

Controls reduce the shortfall in specific ways. Credit insurance covers 40 percent of the chain's balance against default but not against slow payment, so it reduces the downgrade scenario more than the slowdown scenario. The credit line covers a shortfall up to its undrawn amount. The weekly cash forecast shortens the time to detection. The residual figure of $3.2 million assumes the slowdown scenario and subtracts the part the credit line could absorb at its current undrawn level after the minimum cash balance.

An Update Rule

The entry is updated on the last business day of each quarter by rerunning the aging report, recomputing the share and the shortfall with the same 60-day assumption, and checking the customer's rating. If any threshold is crossed between updates, the controller updates the entry immediately and notifies the chief financial officer. A colleague following these steps would need no conversation with the entry's author, which is the test the entry is written to pass. The categories for likelihood and impact follow the enterprise risk definitions the company adopted from the COSO framework (Committee of Sponsoring Organizations of the Treadway Commission, 2017).

References

Committee of Sponsoring Organizations of the Treadway Commission. (2017). Enterprise risk management: Integrating with strategy and performance. https://www.coso.org/

Cox, L. A., Jr. (2008). What's wrong with risk matrices? Risk Analysis, 28(2), 497-512. https://doi.org/10.1111/j.1539-6924.2008.01030.x

Hubbard, D. W. (2009). The failure of risk management: Why it's broken and how to fix it. Wiley.