As for the manufacturing company, the business risk may arise whether the company able to control the output prices. If the company has ability to adjust output prices when there are changes input costs, such as raw material, the lower the degree of business risk. Manufacturing company has the authorities to increase the selling prices of its products, when the raw material costs increases, subsequently company would not bear extra losses. Alternatively, company could not raise the selling prices when the raw material costs increases, the profit of the company will be reduce.
Hence, company bears the business risk. For instance, there was a significant decreased in Wonderful Wire & Cable Berhad’s sales which may due to unexpected and unprecedented escalating prices of copper and aluminium which seriously hurt the earnings of cable manufacturers in the country. On the other hand, retailing company, Hai-O Enterprise Berhad does not face this problem as the company does not incurred raw material costs as the manufacturing company.
Retailing company get the final goods from the manufacturer and sell off the goods through branches, therefore retailing company does not have significant problem on this. The price of final goods that purchased from the manufacture is more stable. Furthermore, for the manufacturing company such as Wonderful Wire & Cable Berhad, will need more finance in order finance its fixed assets. Due to its nature, manufacturing company need more assets to produce their products, so company need more fund to get assets and maintain the assets.
Company may have not enough cash or fund to finance; in order to get more fund, short-term borrowings and long-term borrowings will be adopted. Therefore, the gearing of the manufacturing company will be higher than the retailing company. In 2007, Wonderful Wire & Cable Berhad has negative financial gearing which mean the company has very high accumulated losses. This is caused by the increased prices in copper and aluminium. Company’s equity unable to cover the borrowings, this could lead company into difficulties.
However, retailing company such as Hai-O Enterprise Berhad has high operating gearing might be due to the large inventory that the company need to keep in the warehouse. The inventory that kept in the warehouse need to be guard by security or managed by the staff, this may incurred more extra expenses. As we know that, operating expenses is the ratio of the company’s fixed cost to its total costs. Therefore, the Hai-O Enterprise Berhad has higher operating costs compare to financial gearing.
Company have low financial gearing which mean company does not rely much on borrowings. This gearing indicates that this company is safe for investment. In conclusion, Hai-O Enterprise Berhad and Wonderful Wire & Cable Berhad does not represent all the retailing and manufacturing industry. But, it has indicates that the companies need a good risk management to reduce their risk into an acceptable level. Thus, this could ensure the company able to run their operations smoothly without liquidation problems.