Risk Management

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Chapter 22
Risk Management
Identifying Business Risks
22.1
Dealing with Risk
22.2
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22.1

• Explain why risk is inevitable.
• Describe speculative risk.
• Describe three categories of pure risk.

Section 22.1 Identifying Business Risks
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22.1

• Risk is a fact of life for entrepreneurs.
• To build a successful business and maximize
  profits, they must understand risk and make
  decisions to deal with it.

Section 22.1 Identifying Business Risks
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22.1

• speculative risk
• pure risk
• burglary

robbery electronic credit authorizer negligence
Section 22.1 Identifying Business Risks
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Risk Is Inevitable

• Every business faces riskthe possibility of loss
  or injury.
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• Business risks fall into two general categories

• speculative risk
• pure risk

Section 22.1 Identifying Business Risks
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Speculative Risk

• Most business decisions, such as marketing a new
  product, involve speculative risk.

speculative risk risk that is inherent to a
business, involving the chance of either profit
or loss
Section 22.1 Identifying Business Risks
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Pure Risk

• A natural disaster, such as a flood, or an
  accident involving a customer or an employee is a
  pure risk for a business owner.

pure risk the threat of a loss to a business
without any possibility of gain, such as robbery
or employee theft
Section 22.1 Identifying Business Risks
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Pure Risk

• The three categories of pure risk are

• Crime
• Natural disasters
• Accidents

Section 22.1 Identifying Business Risks
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Crime

• Small businesses are 35 times more likely than
  large businesses to be victims of crime, such as

• shoplifting
• employee theft
• burglary
• robbery
• stolen credit cards and bad checks
• computer crime

Section 22.1 Identifying Business Risks
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Crime

• Techniques to reduce shoplifting include

• Train employees to recognize shoplifters.
• Keep store well lit and merchandise visible.
• Employ two-way mirrors or closed-circuit TV.
• Use tamper-proof price tickets or electronic
  tags.
• Hire a uniformed security guard.

Section 22.1 Identifying Business Risks
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Crime

• Ways to discourage employee theft include

• Establish policies and communicate them verbally
  and orally.
• Lock up all doors that are not needed for entry
  or exit.
• Watch your trash for stolen items.
• Control security.

Section 22.1 Identifying Business Risks
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Crime

• The problem of burglary is growing, but there are
  ways for business owners to minimize their risks.

burglary the act of breaking into and entering
a building with the intent to commit a felony (a
serious crime)
Section 22.1 Identifying Business Risks
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Crime

• It is the business owners responsibility to
  protect employees and customers from crimes such
  as robbery by letting the robber take what he or
  she wants.

robbery the taking of property by force or
threat, usually by means of a weapon
Section 22.1 Identifying Business Risks
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Crime

• Since credit cards can be a source of financial
  loss to a business, an electronic credit
  authorizer machine can be a valuable tool.

electronic credit authorizer a machine that
verifies whether a credit card is good, that is,
not stolen or invalid
Section 22.1 Identifying Business Risks
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Natural Disasters

• Many owners suffer losses, not only from crime,
  but from natural disasters, such as fires,
  earthquakes, tornadoes, and floods.

Section 22.1 Identifying Business Risks
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Natural Disasters

• You can protect your business against fire by
  installing smoke detectors and sprinkler systems
  and protect your cash and documents by storing
  them in a fireproof safe.

Section 22.1 Identifying Business Risks
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Accidents and Injury

• Accidents, another risk businesses face, can be
  financially devastating if a small business is
  held responsible for negligence.

negligence the failure to exercise reasonable
care
Section 22.1 Identifying Business Risks
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22.1

1. Explain why risk is inevitable.

Risk is a part of a businesss daily operations
for example, the risk of customers not paying
when you extend them credit and the risk of a
building being destroyed by a natural disaster.
Section 22.1 Identifying Business Risks
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22.1

1. Describe speculative risk.

Speculative risk involves taking a chance for
profit or loss the risk is inherent to the
business.
Section 22.1 Identifying Business Risks
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22.1

1. Describe three categories of pure risk.

Crime includes shoplifting, employee theft,
burglary, robbery, stolen credit cards and bad
checks, and computer crime. Natural disasters
include fires, earthquakes, tornadoes, and
floods. Accidents and injury can happen to
workers and customers.
Section 22.1 Identifying Business Risks
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22.2

• List the four risk management strategies.
• Describe the steps involved in selecting an
  insurance agent.
• Discuss the procedures for deciding on security
  measures.
• Develop emergency response plans for potential
  crises.

Section 22.2 Dealing with Risk
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22.2

• It is impossible to completely protect your
  business from pure risks, but you can lessen
  their impact through risk management and planning.

Section 22.2 Dealing with Risk
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22.2

• premium
• business interruption insurance
• casualty insurance
• errors-and-omissions insurance
• product liability insurance

fidelity bonds performance bonds workers
compensation independent insurance agent direct
insurance writer
Section 22.2 Dealing with Risk
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Risk Management Strategies

• Risk management, preventing or reducing business
  loss, involves three stages

1. Identify the risks.
2. Estimate potential losses.
3. Determine the best way to deal with each risk.

Section 22.2 Dealing with Risk
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Risk Management Strategies

• Managing risk involves these strategies

• risk avoidance
• risk reduction
• risk transfer
• risk retention

Section 22.2 Dealing with Risk
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Risk Reduction

• Business owners should take these steps to reduce
  risk

• Design work areas to lower chance of accidents or
  fire.
• Communicate with and educate employees on safety
  practices.
• Check and service safety equipment.
• Test company products extensively.

Section 22.2 Dealing with Risk
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Risk Transfer

• A third strategyrisk transfermeans buying
  insurance and paying a premium to cover any
  losses, which transfers some of your risk to an
  insurance company.

premium the price of insurance a person or
business pays for a specified risk for a
specified time
Section 22.2 Dealing with Risk
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Four Types of Business Insurance
Risk Transfer
Property Insurance
Casualty Insurance
Life Insurance
Workers Compensation Insurance
Section 22.2 Dealing with Risk
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Risk Transfer

• Business interruption insurance allows a business
  owner to continue paying important expenses if
  the business is shut down due to property damage.

business interruption insurance insurance
coverage against potential losses that result
from having to close a business for insurable
reasons insurance pays net profits and expenses
while a business is shut down for repairs or
rebuilding
Section 22.2 Dealing with Risk
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Risk Transfer

• If a customer is injured on your business
  premises, casualty insurance will offer you
  protection.

casualty insurance insurance coverage for loss
or liability arising from a sudden, unexpected
event such as an accident and for the cost of
defending a business in court against claims of
property damage
Section 22.2 Dealing with Risk
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Risk Transfer

• Companies that advertise can protect themselves
  by purchasing errors-and omissions insurance.

errors-and-omissions insurance insurance
coverage for any loss sustained because of an
error or oversight on a businesss part, such as
a mistake in advertising
Section 22.2 Dealing with Risk
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Risk Transfer

• Manufacturers can protect themselves by
  purchasing product liability insurance.

product liability insurance insurance coverage
that protects a business from injury claims that
result from use of the businesss products
Section 22.2 Dealing with Risk
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Risk Transfer

• Fidelity bonds and performance bonds are types of
  casualty insurance.

fidelity bonds a form of insurance that
protects a company in case of employee theft
performance bonds insurance coverage that
protects a business if work or a contract is not
finished on time or as agreed
Section 22.2 Dealing with Risk
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Risk Transfer

• Business owners are required to provide workers
  compensation insurance for their employees.

workers compensation insurance insurance that
is required by the government and paid for by
employers to provide medical and income benefits
to employees injured on the job, or for
job-related illnesses
Section 22.2 Dealing with Risk
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Selecting an Insurance Agent

• A business owner can purchase insurance from an
  independent insurance agent or a direct insurance
  writer.

independent insurance agent an insurance agent,
usually local, who represents multiple insurance
companies
direct insurance writer an insurance agent who
works for one particular insurance company, such
as life and automobile companies
Section 22.2 Dealing with Risk
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Choosing Security Measures

• Security measure options include

• secure doors and windows
• burglar alarm systems,
• panic buttons
• card-access systems

• closed-circuit TV monitors
• fire alarms
• smoke detectors
• sprinkler systems

Section 22.2 Dealing with Risk
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Planning for Emergencies

• Your risk management objective should be to have
  procedures in place before a crisis occurs.

Section 22.2 Dealing with Risk
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Planning for Emergencies

• To prepare for emergencies

• Compile emergency phone numbers and floor plans
• Keep important records tagged for quick removal,
• Educate employees about emergency plans
• Carry out practice emergency drills regularly

Section 22.2 Dealing with Risk
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22.2

1. List the four risk management strategies

The four risk management strategies are risk
avoidance, risk reduction, risk transfer, and
risk retention.
Section 22.2 Dealing with Risk
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22.2

1. Describe the steps involved in selecting an
   insurance agent.

Selecting an insurance agent involves defining
the risks your business will face, determining
insurance requirements in your state, and talking
to different types of insurance agents to
determine what they can offer you in the way of
service and products.
Section 22.2 Dealing with Risk
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22.2

1. Discuss the procedures for deciding on security
   measures.

You should assess your security needs, and then
have a professional security company conduct a
review. The companys representative can identify
weaknesses and areas of concern. He or she can
also help you prioritize your security needs.
Section 22.2 Dealing with Risk
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22.2

1. Develop emergency response plans for potential
   crises.

Plans should include a list of priorities and
actions to be taken. You should gather
information such as emergency phone numbers and
floor plans. You should tag important records.
Once the plans are complete, you need to
distribute copies to employees and provide
training.
Section 22.2 Dealing with Risk
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Collecting Customer Data

• The Internet makes it possible for customers to
  connect with companies at any time from virtually
  anywhere.
•  
• Online businesses can gather valuable information
  about its existing customers using cookies,
  surveys, forms, and data mining.

Section 22.2 Dealing with Risk
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Tech Terms
data mining tools software programs that
statistically analyze data to identify patterns,
trends, and relationships within data   online
form a Web page that accepts user input   online
survey a form of market research that appears on
Web sites in which users respond to questions or
provide opinions
Section 22.2 Dealing with Risk
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