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Risk Management Risk Management
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Risk Management Risk Management
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Chapter 22
Risk ManagementRisk Management
Identifying Business RisksIdentifying Business Risks
Dealing with RiskDealing with Risk
22.1
22.2
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Explain why risk is inevitable.
Describe speculative risk.
Describe three categories of pure risk.
Section 22.1 Identifying Business Risks
22.1
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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
22.1
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speculative risk
pure risk
burglary
Section 22.1 Identifying Business Risks
22.1
robbery
electronic credit authorizer
negligence
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Risk Is Inevitable
Every business faces risk—the possibility of loss or injury.
Business risks fall into two general categories:
Section 22.1 Identifying Business Risks
speculative risk
pure risk
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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
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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:
Section 22.1 Identifying Business Risks
Crime
Natural disasters
Accidents
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Crime
Small businesses are 35 times more likely than large businesses to be victims of crime, such as:
Section 22.1 Identifying Business Risks
shoplifting
employee theft
burglary
robbery
stolen credit cards and bad checks
computer crime
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Crime
Techniques to reduce shoplifting include:
Section 22.1 Identifying Business Risks
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.
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Crime
Ways to discourage employee theft include:
Section 22.1 Identifying Business Risks
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.
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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)
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Crime
It is the business owner’s 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
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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
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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.
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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
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1. Explain why risk is inevitable.
Section 22.1 Identifying Business Risks
Risk is a part of a business’s 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.
22.1
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2. Describe speculative risk.
Section 22.1 Identifying Business Risks
Speculative risk involves taking a chance for profit or loss; the risk is inherent to the business.
22.1
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3. Describe three categories of pure risk.
Section 22.1 Identifying Business Risks
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.
22.1
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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
22.2
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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
22.2
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premium
business interruption insurance
casualty insurance
errors-and-omissions insurance
product liability insurance
Section 22.2 Dealing with Risk
22.2
fidelity bonds
performance bonds
workers’ compensation
independent insurance agent
direct insurance writer
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Risk Management Strategies
Risk management, preventing or reducing business loss, involves three stages:
Section 22.2 Dealing with Risk
1. Identify the risks.
2. Estimate potential losses.
3. Determine the best way to deal with each risk.
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Risk Management Strategies
Managing risk involves these strategies:
Section 22.2 Dealing with Risk
risk avoidance
risk reduction
risk transfer
risk retention
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Risk Reduction
Business owners should take these steps to reduce risk:
Section 22.2 Dealing with 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.
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Risk Transfer
A third strategy—risk transfer—means 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
Risk Transfer
Section 22.2 Dealing with Risk 29
Four Types of Business Insurance
Property Insurance
Casualty Insurance
Life Insurance
Workers’ Compensation
Insurance
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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
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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
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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 business’s part, such as a mistake in advertising
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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 business’s products
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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
Section 22.2 Dealing with Risk
performance bonds insurance coverage that protects a business if work or a contract is not finished on time or as agreed
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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
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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
Section 22.2 Dealing with Risk
direct insurance writer an insurance agent who works for one particular insurance company, such as life and automobile companies
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Choosing Security Measures
Security measure options include:
Section 22.2 Dealing with Risk
secure doors and windows
burglar alarm systems,
panic buttons
card-access systems
closed-circuit TV monitors
fire alarms
smoke detectors
sprinkler systems
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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
Section 22.2 Dealing with Risk
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
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1. List the four risk management strategies
Section 22.2 Dealing with Risk
The four risk management strategies are risk avoidance, risk reduction, risk transfer, and risk retention.
22.2
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2. Describe the steps involved in selecting an insurance agent.
Section 22.2 Dealing with Risk
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.
22.2
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3. Discuss the procedures for deciding on security measures.
Section 22.2 Dealing with Risk
You should assess your security needs, and then have a professional security company conduct a review. The company’s representative can identify weaknesses and areas of concern. He or she can also help you prioritize your security needs.
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4. Develop emergency response plans for potential crises.
Section 22.2 Dealing with Risk
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.
22.2
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The Internet makes it possible for customers to connect with companies at any time from virtually anywhere.
An online businesses can gather valuable information about its existing customers using cookies, surveys, forms, and data mining.
Collecting Customer Data
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Tech Termsdata 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
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