Risk Preparation - Liquor Shop Business - Case Study Example

Risk Preparation al Affiliation Contents Introduction 3 Retirement Planning (Life insurance) 4 Figure Life Insurance Flow Chart 4 Choosing an Insurance Plan 4 Figure 2. Sources of Information on Insurance 5 Figure 3. Largest life insurance companies in the United States by Market Share as of September 2014 6 Pros and Cons of an Insurance Plan 6 Cost of Insurance 7 Table 1. Comparing Term and Permanent Life Insurance plans 7 Income with Expiry of an Insurance Plan 8 Rent Business 8 Figure 4. Races in Manhattan 8 Table 2. Income and Expenses Estimates 9 Risks in Rent Business 10 Minimizing Financial Burdens 10 The value of the Building in Ten Years 10 Liquor Shop Business 11 Suitability of the Location 11 Figure 5. Population of Brooklyn in comparison with other areas in NY 11 Figure 6. Age Distribution 12 Table. 3. Education Statistics-Brooklyn NY 12 Regulation of Liquor Business 13 Estimated Budget 13 Costs 13 Table 4. Financial Plan 13 Contemplations 14 Minimizing Risks 14 Financial Risk 14 Legal-contractual Risks 14 Environmental Risks 15 References 15 Introduction Anybody is vulnerable to challenges. These challenges are sometimes related to the environment that one is living in, the time and age as well as other confounding factors that one faces. However, the vulnerability to risk and the probability of the risks happening largely depends on the preparation that one has made concerning the risk (Chen et al. 2009). In risk preparation, the most important and key concept is the identification of the risk. This is then followed by an analysis of the risks and identification of possible means by which the intensity of the risk can be reduced or the risk eliminated. Financial risks, like any other type of risk, needs preparation (Froewiss 1997). This paper focuses on a man who is already facing a financial risk. Being 45 years old, the man is due for retirement in only five years’ time. This means that he will no longer have a constant flow of income. However, although he has no dependents and is divorced, he needs to continue enjoying a cool life as he was when earning 80 million dollars a year salary. He has assets; cars and buildings. He also has a house which he lives in and two buildings in New York which he has inherited from the parents. In his planning for retirement, he has three key considerations in terms of risk preparation. First, he realizes that as he grows old, he will need a life insurance. However, he is unsure of what kind of insurance he can acquire, and how much this would cost him. He also wants to know the pros and cons of the cover and how much in return he will get once the policy expires. The second consideration is related to business opportunity. The man has come into an inheritance of two buildings in New York. One in Manhattan and the other in Brooklyn. In the first building, he wishes to rent college students studios or to a businessman. In his second building, he wants to start a liquor business. In this second consideration, the man wants to have more information on the budgetary requirement, operational costs, and the risks involved including how to minimize them. The man, therefore, has assets and property that can assist him live a comfortable life even after retirement. However, besides the fact that he has no credible information on how to utilize the opportunities, he also require property management assistance to maximize the profits. This paper will focus on providing information helpful to the man in his quest to prepare financially for retirement. The paper will, therefore, provide information and statistics on the three main consideration; life insurance, rent business and liquor shop. Retirement Planning (Life insurance) Insurance has turned into a critical financial compel in most industrialized nations. Superintendents purchase protection to cover their workers against work-related wounds and wellbeing issues (Li et al. 2007). Organizations likewise protect their property, incorporating innovation utilized as a part of creation against harm and robbery. Since it makes business operations more secure, protection urges organizations to make financial exchanges, which advantages the economies of nations (Lewis 1989). Insurance agencies perform a kind of financial redistribution - they gather premiums and inevitably redistribute that cash as installments. Contingent upon the kind of protection, redistribution can take anyplace from a couple of months to numerous decades. In light of this deferral in the middle of gathering and paying out trusts, insurance agencies put their stores to get additional incomes. Such ventures help organizations and governments fund their operations, and benefits from those speculations bolster the operations of insurance agencies (Browne & Kim 1993). Figure 1. Life Insurance Flow Chart Choosing an Insurance Plan To meet ones financial needs, two main types of life insurance can be chosen. The permanent life and term life plans. The permanent life plan requires that an individual contribute to the policy from the time of subscription to the day they die (Daily et al. 2008). The income from this plan is therefore given to the family and the dependents introduced at the start of the policy. This is not an advisable plan for those who have no dependents and this is where the term life plan is at play. In the term life plan, an individual is covered for a specific term say 10, 20 or 30 years. The premiums are lower than the permanent life and the beneficiary receives the lump sum equal to the amount of coverage purchased at the end of the policy period. However, there is no cash value or interest in this plan (Giesbert et al. 2011). Permanent life plan is an excellent choice for individuals want lifelong coverage and equity in the form of a cash value over time and who have dependents in case of death. There are several ways through which Americans can apply for insurance plans. The graph below is an indication of the application options. Figure 2. Sources of Information on Insurance The choice of insurance company depends on several factors. However, majority of people consider the size of the insurance company in terms of market share. By market share, the 2014 statistics indicate that the largest companies are as in Graph 2 below. Figure 3. Largest life insurance companies in the United States by Market Share as of September 2014 Pros and Cons of an Insurance Plan Signing in a life insurance plan has its advantages and disadvantages. This is because having a policy, besides demanding monthly contribution has other factors to consider. Among the main advantages is the security concept. The main purpose of life insurance is to ensure that dependents and beneficiaries can lead an economically good life even after the death of the policy contributor. Secondly, the amount of money obtained after the maturity of the insurance period is not taxable. Moreover, the monthly premium is excluded from the taxable income. Thirdly, with term insurance plan, an individual can secure the future of an investment or a variable. Finally, life insurance is usually government regulated. This provided the required safety and security that anyone will feel free to contribute the premiums (Zietz 2003). However, there are several cons of signing in a life insurance. First, insurance policy cannot be used as an investment. This means that most people underestimate the chances of demise while others do not have dependents to secure. Secondly, paying the monthly premium is a burden to most people who cannot afford and with unstable income, there is a likelihood that an individual will breach the contract and may lose the benefits(Gompers & Lerner 2001). Cost of Insurance The cost of term insurance depends on the net coverage subscribed for, the length of the maturity term, the health status of the individual and the location in terms of risks. This means that with a net coverage of $1,000,000 and a term length of 20 years, the man will be required to pay monthly premiums of between $75 and $100 depending on the insurance company chosen. MetLife has the cheapest policy which requires a monthly premium of $75.99 per month for a $1 million cover. Fidelity Life, one of the oldest insurance companies in America charges $83.33 for the same cover and for an equal term of cover. For permanent life plan with the same conditions, the cost ranges from $60.99 to $85.00 per month in the various insurance companies (Lipartito 2006). Table 1. Comparing Term and Permanent Life Insurance plans Term Permanent Term insurance provides a level premium and a level-death benefit protection for a stated period of time, such as 10 or 20 years. The individual contributes premium for the stipulated period of time upon which the benefits are paid with no cash value, Permanent insurance typically provides both a death benefit and cash savings. There are different types of permanent insurance, including whole life, universal life, index-universal life, variable life and variable-universal life. Designed for short-term needs, or when funds are limited. It is also better for people who have no direct dependents. Designed for long-term needs. Also a better choice for people who have a constant flow of income and who have dependents to secure. You pay for pure death benefit protection, without cash value accumulation. Has cash value accumulation, which is accessible through loans or partial withdrawals Inexpensive initially, with costs increasing at each renewal point Premiums are higher initially, but remain level, regardless of age, for the life of the policy Premiums are usually guaranteed only for the initial term Premiums are guaranteed for the life of the policy. Term conversion privileges are available with most policies. This privilege allows you to convert to a permanent policy that builds cash value, with no additional medical underwriting Income with Expiry of an Insurance Plan When an insurance plan expires, the beneficiaries are entitled to amount equal to the cover signed for. With term life plan, only this principal amount is obtained at expiry. However, the permanent life plan policy provides the beneficiary with the cover amount plus the cash value and the interest depending on the rates agreed upon. Rent Business Manhattan in New York is a highly populated city. Manhattan has an ever growing population as indicated by the demographic information in the graph below. Figure 4. Races in Manhattan With the growing population as college students’ stream in, the demand for housing and studios is increasing. According to a recent report by Bloomberg, the mean monthly rent for a studio room in the city is $2,351. Further, the average rent for a one-bedroom apartment is $3,400. These figures have been considered the highest in seven years. This, therefore, implies that for a person with a building in Manhattan, letting out studios and rooms to the growing student body would be a profitable venture. For the building to qualify for letting, the owner must have it re-finished, re-painted and all the residential housing requirements adhered to. It is only after this that a building can be certified for occupancy. To repair and paint the building, which is likely to have a total of 200 studio rooms and 30 one-bedroom apartments, will cost a total of $150,000. Another $10,000 will also be required to secure certification (Latva-Koivisto 2001). However, with such a venture, all this amount of money can be secured from the financial institutions. Table 2. Income and Expenses Estimates Income Expenses Studios 200 @ 2000 $400,000 Refurbishing $150,000 One-bedroom 30 @ 3,000 $90,000 Certification $20,000 Total $490,000 Monthly maintenance $100,000 Monthly tax $10,000 Total $280,000 This means that for the first one month, the rent business will bring in a total of $210,000 which is a good sum owing to the fact that only $110,000 is recurrent every month. Risks in Rent Business The rent business, like any other business, has risks. The risks are related to both human activity and natural occurrences. Among the most economically important risks in rent, business are the risks of fire, damage to property and lack of tenants to let. Further, there is a current continued uncertainty in the global market, changing demographics and market fluctuations. These risks are an important consideration as they threaten the security of income from the venture (Teece 2010). To cushion these risks, the owner of the property should be protected from the losses. This can be by signing into a fire and property insurance. This will mean that the signed amount must be paid every agreed period and this also occurs as a cost implication for the owner. The homeowner can sign in the homeowner insurance, which insures against hazards associated with loss or damage for the property. Despite having to pay the monthly premiums, ensuring the business against the hazards ensures that the owner does not undergo total loss of property in the event of a hazard. It also ensures that the income generating venture is rebuilt and the owner does not suffer financially from the damage or loss. Minimizing Financial Burdens Financial losses are not only disturbing but are also untimely. This means that any sound management should focus on ensuring that risks are identified and handled. However, handling a risk may be beyond the means and technical ability of the investor. This is where risk management agencies and insurance companies come in. these entities help to insure the business against identified risks and uncertainty allowing the investor to continue with the investment with a peace of mind (Anonymous 2008). The value of the Building in Ten Years In Manhattan, New York, the depreciation of a building which is a rental property is 27.5 years. This means that at the end of every year, the property itself is worth 1/27.5 of its value at the beginning. The implication of this is that the value of the building after 10 years can then be calculated as N= n (1-1/27.5)10 where “N’ is the new value after 10 years and ‘n’ is the current value. Liquor Shop Business Opening a liquor store calls for a strong strategy for success and all around supplied racks. Most popular shops that are well managed experience a lower turnover rate than bigger stores where management is difficult. By utilizing a marketable strategy, start-up alcohol stores can make brilliant stock buys in view of their arrangements statistical surveying, mission, deals objectives and spending plan (Langmaid 1973). Stores that offer liquor face start-up expenses to get and hold a permit, so stock expenses ought to be kept as nearly in accordance with the monetary allowance as could be allowed. In the meantime, it’s essential to offer clients a focused item determination to drive deals. There are several variables to consider when starting a liquor business. First, the person needs to consider the size of the venture in relation to the size of the population to be served. The location of the business and the regulations that a business would face are also points to consider. A small wine shop should focus on an area where people choose to drink at home rather than at a bar. Various ranges of prices should also be considered to serve a larger and diversified population. On the other hand, larger liquor shops need to serve a wider market and even target supply to smaller shops. This implies that the prices can be both at retail and wholesale basis. Suitability of the Location With all factors considered, Brooklyn, New York is a suitable location for a liquor shop. With a total population of over 2.5 million people, the area serves as a suitable market for the commodity. Figure 5. Population of Brooklyn in comparison with other areas in NY The venture is also supported by the fact that of the population, more than half are within the ages of 20-50. Statistically, these represents the age group that is mostly the focus market for liquor business. Figure 6. Age Distribution From the same data, the educational statistics indicate that majority of the people in the town are in decent employment and hence can afford to have some money for entertainment. Table. 3. Education Statistics-Brooklyn NY No High School 187,961 Some High School 183,074 Some College 232,978 Associate Degree 107,444 Bachelors Degree 301,201 Graduate Degree 182,077 Regulation of Liquor Business In Brooklyn, alcoholic beverages can only be sold at designated places. This means that establishing a liquor shop will require certification and licensing. Application for certification should be made and the premises duly inspected. The inspection is to ensure that the premises are away from schools and children playgrounds such as he parks (Langmaid 1973). Further, the sale of alcohol beverages should only be restricted to persons over the age of 16 years. In addition, the law stipulates that the shop should have warning signs against excessive alcohol consumption and sale to underage. Estimated Budget Establishing a venture in Brooklyn is not easy, however, with an existing building which will not require monthly rent, the venture is quite easy to start. This is also supported by the fact that the city is highly populated with people who like partying and, therefore, will form a profitable market for a liquor business. The costs of establishment will, therefore, encompass the renovation cost, the cost of licensure and initial certification. Further, several other fees related to health, environmental management, and security must be met. Costs As indicated by New York Magazine, start-up stock expenses for a claim to fame wine shop can reach $100,000. Proprietors ought to stick to a financial plan and examination accessible items and costs in view of the business evaluated needs. Given the wide fluctuations in the expense of liquor, proprietors ought to stock the store taking into account practical deals objectives, assessed turnover and client bid. Table 4. Financial Plan Expenses Renovation $300,000 Stocking $100,000 Licensure $50,000 Assorted Fees $100,000 Employees $250,000 Total (Monthly) $700,000 Contemplations Given the way of the retail liquor industry, it’s anything but difficult to go over the edge in start-up stock expenses with the trust of drawing in more customers. Alcohol store new companies ought to have gotten an alcohol permit before obtaining stock. State laws frequently oblige proprietors purchase things from authorized sellers, and may have distinctive confinements on buys of lager or wine versus hard alcohol. Little entrepreneurs acquainted with state buying rules can stay away from potential defers or mix-ups with item buys. Minimizing Risks There are different types of risks that a business in New York should seek to look out for. Among these are the financial risks, environmental risks, and legal-contractual risks. Financial Risk These are risks related to money and financial hardships. The risk refers directly to the amount of chance that a business gets involved with assets and ventures. A venture like this one has the risk of undergoing hard times related to cash flow. Running the business smoothly requires that the management of the business to always plan for the use of the resources especially the funds and ensure that each time there is a reduced cash flow, there are savings to handle the problem and create a cushion for the venture. Financial risks can be minimized through insurance and savings. Legal-contractual Risks The innovators should be ready to face the risks associated with the legal compliance and contractual issues. These are issues directly related to licensure and certification of the business to ensure that it is running within the law in terms of sales and management. The risks are also related to employees relations and remunerations. These risks are avoidable through timely compliance to the legal requirements and certification. This can best be achieved through pre-visit and consultation with the regulatory authorities with the view to obtaining information on compliance from the central authority. Further, deliberations and consultation with other businesses that are already established will assist in making the compliance easy. Environmental Risks Businesses are established in environments and have an impact on the said surrounding. There are risks that the business face due to the environmental factors. The Harsh environment is a risk that the businesses must be wary of and prepare appropriately (Langmaid 1973). To prepare for these risks, a business venture should be insured against risks of natural calamities such as earthquakes, floods, hurricanes, and storms as well as against human-related risks such as fires and burglary. Insurance companies are currently covering businesses from the risks associated with the environment. The insurance policies require that the business contribute monthly premiums that and in case of an incident, the business owner is paid the losses (Romley et al. 2007). Further management of risks, especially related to finances can be achieved through proper financial management. This includes the business seeking alternative financing measures such as loans to ensure that there is always a continuous flow of cash and secure the business. References Anonymous, 2008. Business Ethics; Studies from City University of New York have provided new data on business ethics. Business & Finance Week. Available at: http://search.proquest.com/docview/198137518?accountid=14549\nhttp://hl5yy6xn2p.search.serialssolutions.com/?genre=article&sid=ProQ:&atitle=Business+Ethics;+Studies+from+City+University+of+New+York+have+provided+new+data+on+business+ethics&title=Business+&+Finance+Week&issn=19456433&date=2008-08-04&volume=&issue=&spage=&author=Anonymous. Browne, M.J. & Kim, K., 1993. An International Analysis of Life Insurance Demand. The Journal of Risk and Insurance, 60, pp.616–634. Available at: http://www.jstor.org/stable/253382. Chen, X.P., Yao, X. & Kotha, S., 2009. Entrepreneur passion and preparedness in business plan presentations: A persuasion analysis of venture capitalists’ funding decisions. Academy of Management Journal, 52, pp.199–214. Daily, G., Hendel, I. & Lizzeri, A., 2008. Does the secondary life insurance market threaten dynamic insurance? In American Economic Review. pp. 151–156. Froewiss, K.C., 1997. Principles of Insurance: Life, Health, and Annuities. Journal of Risk and Insurance, 64, pp.769–770. Available at: http://media.proquest.com.proxy1.ncu.edu/media/pq/classic/doc/26593318/fmt/pi/rep/NONE?hl=&cit:auth=Froewiss,+Kenneth+C&cit:title=Principles+of+Insurance:+Life,+Health,+and+Annuities&cit:pub=Journal+of+Risk+and+Insurance&cit:vol=64&cit:iss=4&cit:pg=769&cit:date=Dec+1997&ic=true&cit:prod=ABI/INFORM+Global&_a=20120401041203322%3A467016-85040-ONE_SEARCH-67.60.213.67-48509-226930162-DocumentImage-null-null-Online-FT-PFT-1997%2F12%2F01-1997%2F12%2F31---Online------. Giesbert, L., Steiner, S. & Bendig, M., 2011. Participation in Micro Life Insurance and the Use of Other Financial Services in Ghana. Journal of Risk and Insurance, 78, pp.7–35. Gompers, P. & Lerner, J., 2001. The Venture Capital Revolution. Journal of Economic Perspectives, 15, pp.145–168. Langmaid, C., 1973. Liquor licensing. Lancet, 1, p.103. Latva-Koivisto, A.M., 2001. Finding a complexity measure for business process models. Complexity, pp.1–26. Available at: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.25.2991&rep=rep1&type=pdf. Lewis, F.D., 1989. Dependents and the Demand for Life Insurance. American Economic Review, 79, pp.452–467. Available at: http://ideas.repec.org/a/aea/aecrev/v79y1989i3p452-67.html. Li, D. et al., 2007. The demand for life insurance in OECD countries. Journal of Risk and Insurance, 74, pp.637–652. Lipartito, K., 2006. Structuring the Information Age: Life Insurance and Technology in the Twentieth Century (review). Technology and Culture, 47, pp.872–873. Romley, J.A. et al., 2007. Alcohol and environmental justice: the density of liquor stores and bars in urban neighborhoods in the United States. Journal of studies on alcohol and drugs, 68, pp.48–55. Teece, D.J., 2010. Business models, business strategy and innovation. Long Range Planning, 43, pp.172–194. Zietz, E.N., 2003. An Examination of the Demand for Life Insurance. Risk Management and Insurance Review, 6, pp.159–191. Available at: http://doi.wiley.com/10.1046/J.1098-1616.2003.030.x. Read More