Risk Management
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.
Risk Management
speculative risk robbery
pure risk electronic credit
burglary authorizer
negligence
Risk Is Inevitable
Every business faces risk—the possibility of loss
or injury.
Business risks fall into two general categories:
speculative risk
pure risk
Speculative Risk
Most business decisions, speculative risk
such as marketing a new risk that is inherent to
a business, involving
product, involve
the chance of either
speculative risk. profit or loss
Pure Risk
A natural disaster, such pure risk the threat
as a flood, or an accident of a loss to a
business without any
involving a customer or an
possibility of gain,
employee is a pure risk such as robbery or
for a business owner. employee theft
Pure Risk
The three categories of pure risk are:
Crime
Natural disasters
Accidents
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
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.
Crime
The problem of burglary burglary the act of
is growing, but there are breaking into and
entering a building
ways for business owners
with the intent to
to minimize their risks. commit a felony (a
serious crime)
Crime
It is the business owner’s robbery the taking
responsibility to protect of property by force
or threat, usually by
employees and customers
means of a weapon
from crimes such as
robbery by letting the
robber take what he or
she wants.
Crime
Since credit cards can be electronic credit
a source of financial loss authorizer a
machine that verifies
to a business, an
whether a credit card
electronic credit is good, that is, not
authorizer machine can stolen or invalid
be a valuable tool.
Natural Disasters
Many owners suffer losses, not only from
crime, but from natural disasters, such as fires,
earthquakes, tornadoes, and floods.
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.
Accidents and Injury
Accidents, another risk negligence the
businesses face, can be failure to exercise
reasonable care
financially devastating if a
small business is held
responsible for negligence.
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.
Risk Management Strategies
Managing risk involves these strategies:
risk avoidance
risk reduction
risk transfer
risk retention
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.
Risk Transfer
A third strategy—risk premium the price of
transfer—means buying insurance a person or
business pays for a
insurance and paying a
specified risk for a
premium to cover any specified time
losses, which transfers
some of your risk to an
insurance company.
Risk Transfer
Four Types of Business Insurance
Property Casualty
Insurance Insurance
Workers’
Life
Compensation
Insurance
Insurance
19
Risk Transfer
Business interruption business interruption
insurance allows a insurance insurance
coverage against
business owner to continue
potential losses that
paying important expenses result from having to
if the business is shut close a business for
down due to property insurable reasons;
insurance pays net
damage.
profits and expenses
while a business is shut
down for repairs or
rebuilding
Risk Transfer
If a customer is injured on casualty insurance
your business premises, insurance coverage for
loss or liability arising
casualty insurance will
from a sudden,
offer you protection. unexpected event such
as an accident and for
the cost of defending a
business in court
against claims of
property damage
Risk Transfer
Companies that advertise errors-and-omissions
can protect themselves by insurance insurance
coverage for any loss
purchasing errors-and
sustained because of
omissions insurance. an error or oversight
on a business’s part,
such as a mistake in
advertising
Risk Transfer
Manufacturers can protect product liability
themselves by purchasing insurance insurance
coverage that protects
product liability
a business from injury
insurance. claims that result from
use of the business’s
products
Risk Transfer
Business owners are workers’
required to provide compensation
insurance insurance
workers’ compensation
that is required by the
insurance for their government and paid
employees. for by employers to
provide medical and
income benefits to
employees injured on
the job, or for job-
related illnesses
Selecting an Insurance Agent
A business owner can independent
purchase insurance from an insurance agent an
insurance agent, usually
independent insurance
local, who represents
agent or a direct multiple insurance
insurance writer. companies
direct insurance
writer an insurance
agent who works for
one particular insurance
company, such as life
and automobile
companies
Choosing Security Measures
Security measure options include:
secure doors and closed-circuit TV
windows monitors
burglar alarm fire alarms
systems, smoke detectors
panic buttons sprinkler systems
card-access systems
Planning for Emergencies
Your risk management objective should be to
have procedures in place before a crisis occurs.
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
Product Risk Probability Impact
•The technology doesn’t functionally perform as expected
•Product development is late
•Core technology becomes obsolescent
•Product failure rates are too high
Financial Risk Probability Impact
•It takes longer to raise funds than expected
•Operational cash burn is higher than budgeted
•Revenues stay too long in receivables
•Core technology prices increase
Market Risk Probability Impact
•Competitors release superior or earlier product
•Competitors gain control of the target customers
•Competitors claim IP infringement
Operational Risk Probability Impact
•Key staff leave
•Product delivery dates are missed
•IT systems fail