Fire Tenders - Lancashire Fire and Rescue Service Station - Assignment Example

Report on Fire Tenders: Lancashire Fire and Rescue Service station xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Instructor xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Introduction This is a detailed report on the replacement of four fire tenders based at Lancashire Fire and Rescue Service station. The report identifies six risks associated with the replacement or failure to replace the fire engines. Some risks have been shown to have a direct financial focus while others have non-financial or indirectly financial. The report also discusses the steps that may be taken to mitigate the risks, systems and work place controls that may reduce the risks and offers financial reviews to support the proposal. The report concludes by demonstrating how the finances of the fire and rescue service may be safeguarded. Risk identification In risk identification the report is concerned on how the fire engines or the earning capacity of the enterprise can be threatened. According to Horne (2001), financial risk is the risk to the fire station of being unable to cover the required financial obligation. Liquidity risk: every time the fire station makes an investment decision, it is at the same time making a financing decision. A decision to buy a fire engine implies a specific way of financing that project. The question that the fire authority should ask is whether the fire station should employ equity or debt or both. What implications are there of the debt-equity mix? What would be the appropriate mix of debt and equity? The fire engines can be financed by increasing owners’ claim or creditors’ claim. The owners’ claim increases when the fire station raises fund by retaining the earnings. The creditors’ claim is increased by borrowing. These borrowings represents the fixed financial charges, which the fire station should use to magnify the effect of changes in earnings before interest and taxes (EBIT). This kind of financing is intended to earn more on the fixed charges funds than their costs. In the event the return of the fire station is lower than the cost of these funds a liquidity risk will arise since these funds attract some obligations that the fire station has to honour when they are due. This is because the fire station does not have the necessary financial resources to meet the maturing loan liabilities with respect to volume, timing and currency structure. Profit risk: loss of profit or extra expenses caused by a substantial increase in energy or fuel costs. The old fire engines are not cost effective in terms of fuel usage and this exerts pressure on the revenue generated by the fire station. Fire risk – the fire engines use petroleum which can easily catch fire in the process of fighting fire. The fire engines are becoming old and need to be replaced with new ones. The fire engines are worn out, which means the chances of leaking flammable oil from the engine is correspondingly high. Liability risk – the fire station may encounter potentially disastrous liabilities by virtue of its trading activities. The staffs at the fire station are exposed to the risk of explosion by the fire engine and other related work injuries. If such a risk materialized it can force the fire station to close down due to the heavy damages awarded to the claimants. The risk of failure by the fire station to achieve the business objectives – the aim of the fire station is to serve its customers effectively and with urgency. However, the old fire engines cannot guarantee the urgency of fighting the fire due to malfunctioning and breakdowns. Increase in supplier cost price as a result of rising cost of labour and raw materials – the old fire engines are consuming a lot of fuel notwithstanding the high cost of fuel. They also require more than one operator since they are mostly manual. This place pressure on the margin of the fire station and divert management and financial resources from more beneficial uses. Steps that may be taken to mitigate the risks The emphasis is on economic control – unrealistic expenditure is not justifiable in risk management (Weston and Brigham, 2003). There are three main ways in which risk control can be exercised. Reduction – these are the steps taken to ensure that the risk is as low as we can possibly make it. Reduction can take place either before or after the event has taken place. Pre-loss reduction involves those steps taken once a risk has been identified but before the loss occurring. For instance, instructions can be issued with the fire engines to enhance awareness of the usage of the fire engines by the fire station personnel. Post-loss reduction involves those steps taken to reduce the impact of loss once the event has taken place. For instance, installation of fire sprinkler systems can be used to fight fire if it broke into the fire engines. Retention – once a risk has been identified and reduced as far as possible, for those within the pound swapping layer they should be retained. But care must be exercised not to expose the fire station to intolerable levels of loss nor spent money on unjustifiable insurance. When the fire station does not take positive action to avoid, reduce or transfer the possibility of loss involved then that risk is said to be retained. Voluntary risk retention is characterized by the recognition that the risk exists and nothing is done about it. However, in some cases retention is involuntary, for instance, where there is no cover or the premium is prohibiting. Involuntary risk retention takes place when the fire station is exposed to the risk and does not recognize the existence of risk. However, risk retention is not preferred means of mitigating the risks since the amount set aside may be too small at the time of occurrence or the amount set aside may be too much as to deny the fire station an opportunity of investing that resource or even the loss may occur before the fund is sufficient to meet it. Notice that risk retention is usually possible where there are a large number of objects at risk, but none of them is large enough to cause substantial damage. Also where the items are widely distributed so as to be free from the possibility of large losses in a single catastrophe. Transfer – this is transfer to some other party. This can be through an ordinary contract, for example, tender agreement where the fire tender meets any cost of repair of the fire engine. This is possible provided the fire tenders are willing and able to provide the needed security. Transfer can also be by insurance, which is a risk transfer mechanism where one exchanges uncertainty for certainty. It is a means of transferring risk for a consideration of specific payment or premium by one party, the second party contracts to indemnify the first party upto a certain limit for the specified loss that may or may not occur. Conventionally, insurance is always assumed to be the answer to risk. In a soft market where the premium levels are generally low, all that is considered is the cost of premium and not alternatives to insurance, but in a hardening market where premium levels are generally high, alternatives to insurance are considered. Systems and work place controls that may reduce the risks For risk identification to be successful there must be two essentials: The task of risk identification must be someone’s job. This is because everybody’s responsibility is nobody’s responsibility. For instance, having a risk manager or someone’s job description includes risk identification. The tools of risk identification must be available to the person to identify risk. Hussain (1989) outlines the following tools of risk identification organizational charts, checklists, physical inspections, hazard indices, flow charts, and hazard and operability studies. Once a risk has been identified the steps have to be taken to measure the potential impact of the risk on the fire station. This may entail statistical analysis, for instance, data gathering, analysis of first experience, frequency and severity of loss. In carrying out the analysis the following must be borne in mind: Loss experience is important because it yields information on trend or loss patters. Losses must be assessed in terms of their impact on the fire station. Identifying the layers of losses – the bottom layer will be characterized by high frequency and low severity, the middle layer by moderate frequency and middle severity while the top layer will be characterized by low frequency and high severity. The losses or potential losses must be expressed in a way it is easily understood by the user. For instance, damage to the fire engine must be expressed as lost profits. After suffering a damage resulting from a given risk, the fire station should respond to this situation in the following manner: I. Survival: the fire station should define the minimum resources required to meet immediate financial requirement and provide a good management structure. This will help to maintain public confidence and the ability of the fire station providing services and replace defective fire engines and other essential equipment to enable it to continue its operation after the loss. II. Continuity of operations: it is important because if the operations are not normalized, the customers will move to their competitors. In the event that the customers have gone, there is no guarantee that they will ever return to Lancashire Fire and Rescue Service station. Therefore, continuity of operations is important to create confidence in the public. III. Earnings stability: the fire station has to ensure that it is able to resume earning from their services at the earliest opportunity. IV. Continued growth: for growth to continue, operations must continue. Growth of the fire station is important to the economy, the employees, community and stakeholders. Every effort must be made to assist the fire station expand its economic activity. Risk to the fire engines can be reduced by controlling the hazards. Hazards are not themselves the cause of the loss, but they can increase or decrease the effect should the peril operate. They can be physical or moral. Physical hazards as observed by Brigham and Houston (2009) relate to the physical characteristics that may increase or decrease the likelihood of an event. Examples of physical hazards in a fire station are the type of construction of the fire engine, location of the fire engine, the occupancy of the fire station and the age and value of the fire engines. Moral hazards are risks arising from the nature and behaviour of human beings connected with the fire engines. From the viewpoint of the fire station staffs, this may relate to tendencies such as carelessness. The fire station should ensure that there is no oil rags left lying around the fire engine as this may increase the chance of catching fire. The task of operating the fire engine should be assigned to responsible individuals who will report any malfunction and the necessary action is taken in good time and to ensure that the fire engine operate effectively.. Financial reviews to support the proposal. The insurance premium paid has been increasing every year. This is because the insurance charged on fire engines will largely depend on their age. Replacing the fire engines will lower the premium charged for their insurance. If the fire engines are replaced with an automatic model, it will reduce the labour required to operate the fire engines hence minimizing the expenses incurred on salaries and wages of fire station personnel (Madura, 2006). Improved fire engines will enhance the image of the fire station, which will attract many clients to use the services of the fire station. The increase in the number of clients mean that the sales volume will increase hence the revenue for the fire station will be correspondingly high. Conclusion The prime objective of any business entity is maximization of shareholders’ wealth yet risk is a barrier to achieving this objective. The cost of risk can be looked at from the following perspectives: the frequency of risk; the monetary cost or financial severity; the human cost in terms of pain and suffering. It is impossible to remove risk entirely, but steps can be taken to ensure that it is properly managed. Therefore, risk management is a positive help to operational managers in achieving their set objectives. Effects of accidental loss go beyond business environment. They extend to the relatives of employees, tax payers, customers, suppliers and members of the general public. The public relation support is necessary for the fire station to build good social image. As opposed to the assumption that assets are replaced at the end of their physical lives, in practice replacement decision should be governed by the economic and necessity considerations. Equipment or asset should be replaced when a more economic alternative is available. Management is supposed to follow a replacement policy, which is based on economic considerations when making a decision to replace. An economic analysis indicated that the fire engines should be replaced when they are ten years old with an improved alternative. The replacement has not taken place and the fire engines are twelve years old. It is interpreted that the fire station has been incurring extra costs and losing extra profit for the last two years. The report has shown at least three forms of probable risks – duplications, dependencies and concentrations. Duplication has been revealed where research and development functions are repeated in each of the fire stations in the group. This is unnecessary expenditure since general research and development can be applied to all fire stations in the group. Dependency has been revealed where the fire fighting activities depend on fire engines. The management should be satisfied that there is no increase in risk as a result of the dependency. Concentration has been revealed where the accounts records for the fire stations of the entire group are kept in one place. Records for transactions should not be kept in one place so that they cannot be destroyed in a single catastrophe. This is because there is need for careful scrutiny of cash transactions since cash can easily be misappropriated. References Brigham, E. F., and Houston, J. F., 2009. Fundamentals of Financial Management. New York: Cengage Learning. Horne, J. C., 2001. Financial management and policy, (2nd ed.). New Jersey Hussain, A., 1989. A textbook of business finance. Nairobi: East African Publishers. Madura, J., 2006. Introduction to business. New York: Cengage Learning. Weston, J. F. and Brigham, E. F., 2003. Managerial Finance. New York: Winston. Read More