Project Risk Management - Baseline Budget to Start a Retail Shop - Example

Risk Management (Student’s Name) (Institution) Date EXECUTIVE SUMMARY This budget report is to estimate the amount of money that we can use to start a retail shop. This budget report is determine budget problems or risk involve in budgeting so that appropriate course of action can be taken to provide solutions to such problems. To effectively examine the risk that involve in the whole process, Monte Carlo Simulation and @risk software was used to ensure that correct cost estimates is determined to avoid under and over estimation of costs. Underestimation of the cost of start up retail shop is likely to time wastages and other potential penalties while overestimation of cost is also likely to cause wastages of resources. With the use of good analytical tools, we were able to produce reasonable cost projections that enable use complete our project. In normal circumstances, it is impossible to expect every contingency since even good budget has under or over estimation. Table of Contents Risk Management 1 PROJECT SCOPE 3 Organizational policy 13 PROJECT SCOPE The purpose of this budget report is to estimate the cost of starting up a retail business using the most reasonable cost. This budget report is only required to determine the best cost of starting a retail shop without wasting more resources and time. This is to determine the risk of budgeting which is likely to affect much business organization. The start up items for this business includes administrative cost, cost of sales, personnel, professional fees, sales and marketing and technology. The cost of starting this retail shop is expected not to exceed $665000 but should not be less than $615000. In the analysis of the budget, a random variable probability distribution is selected for every budget element in a triangular manner. This is a very good distribution since its peak is a show initial value that was observed as most likely values. It then moves linearly towards the minimum allowed values and finally on the right towards the maximum allowed values. The triangular distribution is able to produce expected values, the value 10% likely and 90% likely. Recommended baseline budget The recommended baseline budget for the start up retail shop is as shown below. The minimum value for starting this shop is $615000 while the maximum value is $665000. Administrative cost is expected to cost more than $70,000 but less than $80,000. Our cost of sales is estimated to be at $125,000 for a minimum vale and for a maximum value it is expected to cost $135,000. The rest are shown in the table below. Cost/Budget Item Input Values Min.  Allowed 10% Likely Expected Values 90% Likely Max. Allowed   Administrative $70,000         $65,000       $67,709     $71,667          $76,097     $80,000         Cost of Sales $125,000         $120,000       $122,709     $126,667          $131,097     $135,000         Personnel $335,000         $325,000       $329,950     $336,667          $343,826     $350,000         Professional Fees $15,000         $12,000       $13,533     $15,667          $17,984     $20,000         Sales & Marketing $50,000         $45,000       $47,216     $50,000          $52,744     $55,000        Technology $20,000         $17,000       $18,533     $20,667          $22,984     $25,000       Administrative Costs This administrative cost for this business involves, salaries to office staff, directors remuneration and motivation fees. We tried very hard to minimize the administration cost by eliminating other unnecessary costs such as staff allowances so that we could use as low as $71,667. This reduces cost wastages by a small margin. Cost of Sales  This is the cost used to purchase goods for resale. This start up cost was minimized by increasing lead time so that it was reduced. It was also reduced by buying goods for cash and in large volumes in order to receive both cash and trade discount. The minimum cost for cost of sales was expected to be $125,000 while maximum cost $135,000. It improper to use minimum cost since it waste business time while maximum cost increases cash wastages. Personnel This is the cost that the company uses to pay employees. This cost is also high as it involves salaries, recruitment cost and motivation money. This cost is very high and may increase the overall budget cost. Marketing The marketing cost of this project involves exterior sign, interior signature, trade mark, logo design, design of business card and printing cost. The company must participate in a number of marketing actions so that it can build brand for the new business. Technology The company must also incur technology cost which involves the purchase cost of computers and printers. It must also spend some money for IT consolation, domain registration, Google services and website hosting. Professional Fees This company must also spend some money for hiring professional such as accountants and other professionals so that it can implement the business appropriately. Risk events During the start up of this retail shop, it is likely to face some uncertain events which may lead to loss of money and time wastages. These risks are explained below. Conflicts of Interest When stating retail shop, it is likely to face a risk of conflict of interest where the employees may also develop interest on the business. The conflict of interest may arise when the investment in a portfolio firms of a relevant fund. The available funds will be required to be used in another investment project and this may reduce the amount the total budget cost. Limited Operating History of Funds This project is likely to face the risk of limited operating history of funds. The funds used in the start up retail shop will be new in the business and therefore carries no historical information. It is hence difficult to evaluate the investment project and as a result the fund may not be able to achieve its purpose. Absence of Liquidity and Public Markets This project is also likely to face the risk of lack of liquidity and public market. It therefore only allows the investment to be private and also has no liquidity position. Due to that this business will not have public market for its shares since the business is still unknown. The liquidity can only be established when the business has been in the market for a while. The investment in this project will also be liquid as it will not be easily transferable and has high risk. Difficulty in Valuing Startup Investments To produce objective value for this business is nor easy and it is also very hard to determine the strength of applicable risk and its likelihood of the business to produce high profit margin. This is because it is not likely for a start up business to have market for its products. This makes it difficult for investors to value the business. Contingency This is time of cost that is added in the budget to replenish financial shortage. This is one of the most important ways of managing risk when budgeting. The whole process ensures that there is an increase in the amount of total budget which may lead to excessive use of financial resources. The financial resources and time which are increased result from uncertain events and the contingency amount is used to solve the risk of uncertain future outcome that may appear in the project capacity. Total Cost - Baseline Budget = Project Contingency $615000 - $665000 = $45000 The common contingency percentage is 50/50% and that which may lead to greater success is 90%. The most appropriate contingency percentage is that which is based on the experience of the project manager and the business organization historical records. In a case where historical records indicates that the estimated error occur between 25% and 40%, the best contingency percentage is at 90% and those that appear between 10% and 15% it should be set at 50%. For the case of this project, the amount used on personnel, administration, cost of sales and sales and marketing are mostly affected which show that the increase in additional cost, there is also increase in the start up cost. The estimate error of this project is appearing between 25% and 40%, the best contingency percentage is at 90%. Sensitivity analysis From the above result we are able to produce sensitivity report that indicates relative impact of the input variables based on the total budget. 628000 624000 622000 620000 618000 616000 614000 612000 610000 608000 Personnel Administrative Cost of sales Sales and marketing professional fees Technology The line that appear horizontally represent total budget shown as the total of initial budget input variable. The lines that appear vertically show the value of output range that occurs between 10% possible and 90% liable values. The items that appear on the vertical lines have higher effect on the total budget. Total budget sensitivity to 10% likely Initial 90% likely Amount Variance cumulative Personnel $609950 $615000 $623826 48% 48% Administrative $612709 $615000 $621097 17% 65% Cos of sales $612709 $615000 $621097 17% 83% Sales and marketing $612216 $615000 $617744 8% 90% Professional fees $613333 $615000 $617984 5% 95% Technology $613333 $615000 $617984 5% 100% From the result above, it can be noted that personnel budget has more influence on the output variables of 48% while technology budget is observed to be least influential with an influence of 5%. After this 1000 000 Monte Carlo simulation trials was run and the results were as shown below. Minimum result:  $600,651                    $615,000 Initial Total Budget value     Maximum result: $649,455                    20.6% of results are equal or lower     Expected value: $621,314               79.4% of results are equal or greater     Std Deviation:     $7,484           The percentage simulation values that falls below different total budgets are shown below. 5% Read More