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 identificationIn 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.