Business Risks
Rohit Sindhwani
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.
Some examples
A product recall by toy maker Lego cost them £3.5
million, even after company had made extensive
procedures
NEC, a mobile manufacturer, sub-contracted the
production of phone chargers but faulty circuitry resulted
in product recall of 97000 units
Smith Kline Beecham recalled 12 million glass bottles due
to faulty design
A baby car manufacturer estimated that product recall
cost the company entire year’s profit
In the largest ever recall of vehicles in India, Volkswagen
recalled 3.24 lakh cars in December, 2015
Recent Catastrophic Failures
Year Event Cause Effects
1981 Hyatt Regency Change in design Over 100 people
Walkway collapse killed
1984 Toxic gas released at Burst Valve 3000-10000 people
the Union Carbide died
plant in Bhopal, India
1986 Nuclear reactor at Power surge caused 250000 people may
Chernobyl exploded the nuclear rods to have died, plus
disintegrate, causing damage to
overheating and agriculture and the
explosion environment
1991 Warsaw radio mast Structural damage by Was world’s tallest
collapsed wind induced structure
oscillations
2001 World Trade Center Terrorist Attack 2996 people killed
destroyed
2003 Space shuttle Piece of foam that All crew member died
Columbia disaster broke off during
launch
2018 Kerala Floods Heavy rainfall, dam Number of people
capacity, died and heavy
deforestation displacement
Can you guess?
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 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 Risks continued
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 Risks continued
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 Risks
Risks resulting from natural causes.
Examples include:
Floods
Earthquakes
Tornadoes
Hurricanes
Fires
Lightening
Droughts
Unexpected changes in normal weather
conditions
Human Risks
Risks 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.