Risk Management

Chapter 34
O The primary goal of every business
is to make a profit
O There is no guarantee this will
O The possibility of financial loss is
known as Business Risk
O The systematic process of
managing an organization’s
risks to achieve objectives in a
manner consistent with public
interest, human safety,
environmental needs, and the
O Economic Risk – result from changes in overall
business conditions
O Natural Risk – changes caused by natural
O Human Risk – changes caused by employee
dishonesty, errors, mistakes, or omissions as
well as the unpredictability of customers or the
workplace itself
O Changes include:
O The level or type of
O Changing consumer
O Population changes
O Inflation
O Recession
O Limited usefulness or
style of product
O Product obsolescence
O Government regulation
O Competition
O Failure to keep up with
competition leads to lost sales
O New foreign completion
threatens business
O Products can be produced
cheaper over seas
O Consumer lifestyle and population change
O Must adapt to changing want and needs of
the consumer
O A change in population could mean an
increase or a decrease in potential consumers
O New communities (Ashburn)
O Aging communities (rural towns)
O Limited Usefulness and Product Obsolescence
O Products inevitably become outdated
O Atari
O Cassette tapes
O New products are always being developed
O The development of more advanced products
makes older ones no longer useful
O Film cameras, typewriters, VCRs, portable stereo
O Recession and Inflation
O Businesses in areas with
high unemployment will
suffer because less people
are spending
O If prices for basic products
rise, people will have less
disposable income
O Government Laws and Regulations reduce
overall profits
O Special licenses and permits
O Street and Sewer Improvements
O Environmental Clean-up
O Parking
O Product Recalls
O Results in the loss or damage of property and may
cause businesses to be shut down. Catastrophes
such as:
O Floods
O Tornados
O Hurricanes
O Fires
O Lightning
O Drought
O Earthquakes
O Sometimes natural risks are
caused by people:
O Power outages
O Civil unrest
O Oil spills
O Arson
O Terrorism
O War
O Businesses can insure against unexpected
losses from some natural risks, but not all
O Business insurance typically doesn’t cover
acts of war or riot
O Special insurance is often needed to cover
flood and earthquake damage
O Weather is an important natural risk
to consider
O Some businesses and products
depend on predictable weather
conditions for success
O Ski resorts rely on snow fall
O Beach resorts affected by hurricanes
O Farmers require sufficient rainfall
O Range from the financial impact of robbery
or embezzlement to job related illness or
O Customer Dishonesty:
O Customer Theft
O NRF determined that retailers lose $15-$37
billion a year from shoplifters
O Fraudulent Payment
O Nonpayment of accounts
O Employee Risk:
O Unethical business practices
O Embezzlement
O Misuse of company goods,
resources or supplies
O Misuse of company time
O Computer-Related Crime
O Worms or viruses downloaded by
employees accidently
O Hackers or employees can penetrate
secure networks and access proprietary
company information or client lists
O Training employees on privacy policies
and the proper handling of confidential
information is necessary to decrease risk
O There are
basic ways to handle
business risk
O Risk Prevention and Control
O Risk Transfer
O Risk Retention
O Risk Avoidance
O Some business risks can be
controlled or minimized by:
O Screening and Training Employees
O Providing Safe Conditions and
Safety Instruction
O Preventing External Theft
O Deterring Employee Theft
O Screening Employees
O Background Checks/Reference
O Pre-employment Tests
O Drug Testing
O Training Employees
O Orientation, training and
instruction to understand policies
and procedures
O Providing Safe Conditions and Safety Instructions
O Design safe employee work zone for traffic and storage
O Training on proper ways to lift and store merchandise
O Develop accident management programs
O Check and correct hazards
O Ensure compliance with state and federal regulations
O First aid kits near workstations
O Distribute written safety and health plans
O Preventing Theft
O Largest and most common form of
human risk
O Lock up valuable merchandise
O Adequate lighting
O Tag products with anti-theft devices
O Hire security personnel and install
security devices
O Preventing Theft
O Robbery: stealing of money or
merchandise by violence or threat
O Keep limited amounts of money on
O Hire security guards
O Set alarms and lock doors
O Employee theft represents 48% of all business
losses due to theft
O Prevention:
O Closed circuit television
O Cameras concealed in mannequins, ceilings or
O POS terminals (generates computer reports)
O Monitors voids, cash intake, sales and refunds
O Transferring the risk of loss to another business
or party
O Purchasing Insurance
O Property Insurance – to protect buildings,
equipment and machinery
O Liability Insurance – to protect company from
damages which they can be held legal
O Establishing Product Warranty Periods
O When a business retains, or assumes, the
financial responsibility for the consequences
of loss
O Unsold merchandise after a change in trends
O Damaged items returned or removed from
the sales floor
O When a business refuses to engage in
particularly hazardous activity
O Can often be determined by market
O Is an investment/activity worth the risk
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