Business RisksBusiness Risks

How much of a risk are you willing to take?

Going out on a limb.

Business Risks Terms

Risk– The possibility of a financial loss.

Risk management– The process of managing a business’s

exposure to risk in order to achieve business objectives.

Business risk– The possibility of business failure or loss.

Types of Risks Speculative risk

– Risking loss to make a profit. – Possibility of seeing a loss, no change, or

actually making profit– Examples include

• buying new machinery• constructing new buildings

Pure risk– The possibility of loss to a business without any

possibility of gain• Economic risks• Natural risks• Human risks

Economic RisksEconomic Risks Risks that result from changes in overall business conditions. Examples of economic risks include: Competition – More businesses that would

compete with your business open in the area.

Changing consumer lifestyles – The lifestyle of the consumers in your area changes due to new industry opening or closing, new businesses, etc.

Population changes – Potential customers – moving out due to economic downfall

– or moving in due to new economic opportunities

Economic RisksEconomic Risks continuedcontinued

Limited usefulness of products - new products introduce replace your products or the needs of customers’ needs change

Inflation – the availability of cash to customers will reflect in the buying patterns.

Product obsolescence – products you offer to the public is not longer needed or out-of-date.

Economic RisksEconomic Risks continuedcontinued

Government regulation – new regulations can change the status of your products. Products can be recalled because of safety measures such as baby products or medicines.

Recession – Just as with inflation the availability of cash affect customer purchases.

Natural RisksNatural Risks

Risks resulting from natural causes. Examples include: Floods Earthquakes Tornadoes Hurricanes Fires Lightening Droughts Unexpected changes in normal weather

conditions

Human RisksHuman RisksRisks caused by human errors as well as the unpredictability of customers, employees, or the work environment. Shoplifting Employee theft Burglary Robbery Computer crime Stolen credit cards and bad checks Accidents and injury

Managing Business Risks

Ways to Reduce Risk Design work areas to reduce the chance

of accident or fire. Educate employees on safe use of

equipment. Check and service safety equipment on a

regular basis. Stress the limits of your company’s

products. – Provide customers with instructions on the

proper and safe use of products, as well as warnings about possible hazards.

Ways to Reduce Risk Shoplifting is a form of external theft that

involves taking items from a business without paying for them.

Ways to reduce shoplifting. – Educate employees on shoplifting prevention

guidelines.– Provide effective store layouts with adequate

lighting and orderly displays.– Store expensive items in locked display cases or

tag expensive merchandise with electronic devices.

– Employ the use of two-way mirrors, security personnel, or closed circuit television.

Ways to Reduce Risk Control employee theft.

• Install closed-circuit television systems and point-of-sale terminals that generate computerized reports.

• Provide company policies that make employees aware of expectations.

• Utilize pre-employment testing to detect employee attitudes about honesty.

Ways to Reduce Risk Implement ways to reduce robbery.

Robbery involves the taking of property by violence or threat.

– Limit the amount of money kept on hand. • Use a safe.

– Handle bank deposits discreetly.– Install surveillance cameras to help identify

robbers.– Schedule employees so that no one is alone in a

business at any time.– Hire security guards.– Provide adequate lighting inside and outside of

the building.– Make sure that doors are locked and alarms are

set at night.

Ways to Reduce Risk

Purchase property insurance to cover: – the loss of physical property such as cash,

inventory, vehicles, buildings.– real property such as buildings, land, and fixtures.– personal property such as vehicles, clothing,

furniture, jewelry. Purchase business interruption insurance

to make up for: – lost income if a business is shut down for

repairs or rebuilding.

– Allows a business owner to continue to pay rent, salaries, and other key payments.

Ways to Transfer Risk Purchase casualty insurance to:

– Protects a business from lawsuits. – Pays the claim if a person is injured on your

business premises or if a worker causes damage

– Types of casualty insurance• Errors-and-omissions insurance: Protects businesses

from lawsuits resulting from mistakes in advertising.• Product liability insurance: Protects manufacturers

from claims for injuries that result from using their products.

• Fidelity bonds: Protect companies from employee theft.

• Performance bonds: Protect a business if work is not finished on time or as agreed.

Ways to Transfer Risk

Purchase life insurance to: – Pay a business in the event of the insured

person’s death.– Covers owner(s) and key management

employees

Ways to Transfer Risk

Pay Workers’ Compensation– A government-regulated program which provides

medical benefits and income to employees who are injured on the job.

– Compensation is dependent on the wages or salary of the employee, the seriousness of the injury, and whether the injury is permanent or not.

– Frees businesses from the threat of employee lawsuits

Business Risk Retention Businesses is self-insurance against

business loss. – If a business cannot or does not provide for

ways to transfer risk using one of the described means, the business should set aside money each month to help cover the costs should a loss occur.

– Planning for the unexpected, can save a business.

Emergency Planning

Businesses must: – create emergency response plans to help

handle emergency situations more smoothly.

– have procedures in place before a crisis occurs.