Risk Management and Types of Risks

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Risk Management and
Types of Risks
By Tony Collins
Edited by Memory Reed
Georgia CTAE Resource Network 2010
Lesson Objectives
Define Risk and Risk Management
 List and Describe 3 Types of Risks
 Know and Understand 4 Basic Ways to
Handle and Control these Risks
 List 3 types of Ways to Transfer Risks
 Know the Difference Between Risk
Avoidance and Risk Acceptance

What is Risk Management?
Risk - The possibility of financial loss
Management - The business function used to
plan, organize, and control all available
resources to reach company goals
Risk Management - The systematic process of
managing an organization’s risk exposure to
achieve objectives in a manner consistent with
public interest, human safety, environmental
factors, and the law.
Kinds of Risks
3 Types
Economic
Natural
Human
Economic Risks
– These risks occur from changes in
overall business conditions.
– This can include:
 amount or type of competitor(s)
 changing consumer lifestyle
 population changes
 government regulations
 inflation
 recession
Natural Risks
Natural risks are result from natural disasters
or disruptions
 floods
 tornadoes
 hurricanes
 fires
 droughts
 lightning
 earthquakes
 even sudden abnormal weather conditions
Human Risks
These are caused by human mistakes and errors, as
well as the unpredictability of customers, employees, or
the work environment
This could include:







Theft
injury on the job
bad checks
employee error
Negligence
Incompetence
etc.
Ways to Handle Business Risks
There are 4 principle ways to handle risks
–Risk Prevention and Control
(Loss Prevention)
–Risk Transfer
–Risk Acceptance
–Risk Avoidance
Risk Prevention and Control
– Screening and Training Employees
– Providing Safe Conditions
– Providing Safety Instruction
– Preventing External Theft
– Deterring Employee Theft
– This is often called “Loss Prevention” in the business
world
Risk Transfer
3 Common
Risk Transfers
– insurance
– product/service
warranties
– transference through
business ownership
Insurance
– Insurance policy - contract that covers a
business with a specific type of insurance
reducing risks
– Business liability - insurance protects a business
against damages for which it may be held legally
liable, usually up to only $1 million.
– Personal liability - covers damages by customer
and/or employees
– Product liability - protects from personal injury
caused by product manufactured or sold by the
business
Product/Service Warranties

Warranties are simply
promises made by the
seller or manufacturer
with respect to the
performance and
quality of a product
and protection against
loss
Transference Through
Ownership

The total amount of risk the business must
handle depends in part on the type of
business ownership
– For example, a entrepreneur who owns a
sole-proprietorship assumes all the risk as
where a stockholder in a corporation assumes
only his percentage of the risk.
Risk Acceptance
When the business assumes the loss
responsibility into the upkeep of the
company
 Most companies pull out a certain
percentage of their revenue for damages,
loss to theft, and unsold items.

Risk Avoidance

Risks can be avoided by advance anticipation
 Following market research can assist a business
in making the decision on whether or not to
invest in a product.
 To determine whether the product is a low risk
you must weigh the potential benefits against the
potential risks
Risk Management Plan
Develop an overall Risk Management Plan
for the business
 Develop a specific Risk Management Plan
for specific events that occur within the
business
 Revisit the plan regularly to update

What We Have Learned

The three types of risks: economic, natural, human

The terms important to Risk Management:
– risk - the possibility of financial loss
– risk management - the process of how a business controls the risk of
financial loss while staying consistent with the public’s interest, safety,
environmental factors, and the law

There are more ways than one to handle risks effectively.
–
–
–
–
Loss prevention
risk transfer - insurance, warranties, and transferring ownership
risk acceptance - assume responsibility of loss
risk avoidance - anticipating product failure and not investing in
product/service
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