Risk Assessment And Mitigation In E-Business
E-business such as renting online clothes provides a variety of advantages such as exposure to a wide range of customers for collection of advanced apparels. Further, starting an online rental clothing boutique exposes the owner to several industry-wide risks. In case these risks are not mitigated by the owners, it could lead to a concise and unexpected exit from the competitive industry. The risks involved in the opening of renting clothing online are first, inventory management. It is important for the owner to keep a sufficient supply of clothing online. The same implies that whenever consumers’ gives the order they expect that the clothes of their size and colour are accessible to that site. Moreover, in contrary to this, an excess of inventory is leading to enhancement in dead stock when the trend changes. As the trends and preferences of consumers keep on changing, thus in that case, owners give discounts so that consumers purchase it which can results in losses for the owner. Thus, trend analysis is another significant risk present in the online retail clothing. Nowadays, the trend in the fashion industry is changing at a fast pace. In order to remain in the competitive market, it is important for the owner to be updated with the changes taking place in the trends of the consumers.
Since one wrong step could lead to unnecessary inventory, undermined the credibility and perplexed brand identity for the owner. The same can be mitigated by employing knowledgeable management, procuring information relating to well-known brands and buying commercialised clothing rather than perilous, lower grade, hit or miss products. Apart from this, as per the study of Pappas (2016), marketing strategies can also mitigate the risk to a significant extent. The business should target the suitable consumers and offer products that match up with this demographic. Further, the brand should be updated in accordance with the changes in the economic conditions.
EXIT strategy and Valuation at EXIT
Two exit strategies which can be applied in case of online rental clothing business is mergers and acquisitions or shutdown. The strategy of mergers and acquisitions will entail to sell off the company to a big organization or merging with related one. This provides some benefits such as, through uniting resources with the organization or by attaining access to them through an acquisition, the company could survey new growth areas and develop into areas which were tentative to explore before. Further, in the second option close the virtual doors and settle, moving onto the next thing. The same may sound to be a failure, but in actual it is not. Kuratko (2016), asserts that it is not likely going to be the ideal strategy for the doing business online in case of continue losses or in case of availability of another better opportunity.
Discounted cash flow (DCF) can be described as a valuation method which goes a long way in estimating the attractiveness of a particular investment. The DCF makes use of a future free cash flow projection method by discounting them to arrive at an annual rate and understand estimates. The growth rate of the business has been calculated using the Compounded annual growth rate whereby the change in the cash flow has been considered and compared with the cash flow of the previous year in order to understand the changes. With respect to the same, the growth rate every year changes based on the increase in the cash flow of the present year as compared to the previous year. For instance, in the year 2020, the growth rate is 1. 98% whereby the cash flow has changed from 1696091$ to $1729835. In the same manner, with respect to the year 2021, there has been an increase of 4. 22%, in the year 2022, the growth rate as compared to the previous year is 4. 022% and lastly in 2023, the growth rate has been 0. 89%. The growth rates have been positive throughout.
The DCF method
Hence, according to the given formula, the business valuation can be stated to be $5637964 as of 2019. The discounted cash flow valuation can be essentially described as a fundamental model used in understanding value investing. The model is essentially made use of by calculating the present value of an organization by dividing it with expected returns to gather the present value by taking a discounted rate or popularly known as the weighted average cost of capital. In the given case, the discounted rate was assumed to be 15% and the growth rate each year was calculated using the increase in the cash inflows per year. The growth rate for the period ranged between 0. 89-4. 2percent. Finally, it was observed that the business has been valued at $5637964 which can be taken to be considerably fair.
