Risk Management
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Risk Management
Chapter 22
Risk Management
22.1
Identifying Business Risks
22.2
Dealing with Risk
2
Risk Management
22.1
Explain why risk is inevitable.
Describe speculative risk.
Describe three categories of pure risk.
Section 22.1 Identifying Business Risks
3
Risk Management
22.1
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
4
Risk Management
22.1
speculative risk
pure risk
burglary
Section 22.1 Identifying Business Risks
robbery
electronic credit authorizer
negligence
5
Risk Management
Risk Is Inevitable
Every business faces risk—the possibility of loss
or injury.
Business risks fall into two general categories:
speculative risk
pure risk
Section 22.1 Identifying Business Risks
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Risk Management
Speculative Risk
Most business decisions,
such as marketing a new
product, involve
speculative risk.
Section 22.1 Identifying Business Risks
speculative risk risk
that is inherent to a
business, involving the
chance of either profit or
loss
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Risk Management
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.
Section 22.1 Identifying Business Risks
pure risk the threat of
a loss to a business
without any possibility of
gain, such as robbery or
employee theft
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Risk Management
Pure Risk
The three categories of pure risk are:
Crime
Natural disasters
Accidents
Section 22.1 Identifying Business Risks
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Risk Management
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
Section 22.1 Identifying Business Risks
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Risk Management
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.
Hire a uniformed security guard.
Section 22.1 Identifying Business Risks
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Risk Management
Crime
Ways to discourage employee theft include:
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.
Section 22.1 Identifying Business Risks
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Risk Management
Crime
The problem of burglary is
growing, but there are
ways for business owners
to minimize their risks.
Section 22.1 Identifying Business 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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Risk Management
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.
Section 22.1 Identifying Business Risks
robbery the taking of
property by force or
threat, usually by means
of a weapon
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Risk Management
Crime
Since credit cards can be a
source of financial loss to a
business, an electronic
credit authorizer machine
can be a valuable tool.
Section 22.1 Identifying Business Risks
electronic credit
authorizer a machine
that verifies whether a
credit card is good, that
is, not stolen or invalid
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Risk Management
Natural Disasters
Many owners suffer losses, not only from crime,
but from natural disasters, such as fires,
earthquakes, tornadoes, and floods.
Section 22.1 Identifying Business Risks
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Risk Management
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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Risk Management
Accidents and Injury
Accidents, another risk
businesses face, can be
financially devastating if a
small business is held
responsible for negligence.
Section 22.1 Identifying Business Risks
negligence the failure
to exercise reasonable
care
18
Risk Management
22.1
1. Explain why risk is inevitable.
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.
Section 22.1 Identifying Business Risks
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Risk Management
22.1
2. Describe speculative risk.
Speculative risk involves taking a chance for
profit or loss; the risk is inherent to the business.
Section 22.1 Identifying Business Risks
20
Risk Management
22.1
3. Describe three categories of pure risk.
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.
Section 22.1 Identifying Business Risks
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Risk Management
22.2
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
Risk Management
22.2
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
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Risk Management
22.2
premium
business interruption insurance
casualty insurance
errors-and-omissions insurance
product liability insurance
Section 22.2 Dealing with Risk
fidelity bonds
performance bonds
workers’ compensation
independent insurance agent
direct insurance writer
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Risk Management
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.
Section 22.2 Dealing with Risk
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Risk Management
Risk Management
Strategies
Managing risk involves these strategies:
risk avoidance
risk reduction
risk transfer
risk retention
Section 22.2 Dealing with Risk
26
Risk Management
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.
Section 22.2 Dealing with Risk
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Risk Management
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.
Section 22.2 Dealing with Risk
premium the price of
insurance a person or
business pays for a
specified risk for a
specified time
28
Risk Transfer
Four Types of Business Insurance
Section 22.2 Dealing with Risk
Property
Insurance
Casualty
Insurance
Life
Insurance
Workers’
Compensation
Insurance
29
Risk Management
Risk Transfer
Business interruption
insurance allows a
business owner to continue
paying important expenses
if the business is shut down
due to property damage.
Section 22.2 Dealing with Risk
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 Management
Risk Transfer
If a customer is injured on
your business premises,
casualty insurance will
offer you protection.
Section 22.2 Dealing with Risk
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 Management
Risk Transfer
Companies that advertise
can protect themselves by
purchasing errors-and
omissions insurance.
Section 22.2 Dealing with Risk
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 Management
Risk Transfer
Manufacturers can protect
themselves by purchasing
product liability
insurance.
Section 22.2 Dealing with Risk
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 Management
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
performance bonds
insurance coverage that
protects a business if
work or a contract is not
finished on time or as
agreed
Section 22.2 Dealing with Risk
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Risk Management
Risk Transfer
Business owners are
required to provide
workers’ compensation
insurance for their
employees.
Section 22.2 Dealing with Risk
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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Risk Management
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
direct insurance writer
an insurance agent who
works for one particular
insurance company, such
as life and automobile
companies
Section 22.2 Dealing with Risk
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Risk Management
Choosing Security
Measures
Security measure options include:
secure doors and
windows
burglar alarm systems,
panic buttons
card-access systems
Section 22.2 Dealing with Risk
closed-circuit TV
monitors
fire alarms
smoke detectors
sprinkler systems
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Risk Management
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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Risk Management
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
Section 22.2 Dealing with Risk
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Risk Management
22.2
1. List the four risk management strategies
The four risk management strategies are risk
avoidance, risk reduction, risk transfer, and risk
retention.
Section 22.2 Dealing with Risk
40
Risk Management
22.2
2. Describe the steps involved in selecting an
insurance agent.
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.
Section 22.2 Dealing with Risk
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Risk Management
22.2
3. Discuss the procedures for deciding on
security measures.
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.
Section 22.2 Dealing with Risk
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Risk Management
22.2
4. Develop emergency response plans for
potential crises.
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.
Section 22.2 Dealing with Risk
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Risk Management
Collecting Customer Data
The Internet makes it possible for customers to connect with
companies at any time from virtually anywhere.
Online businesses can gather valuable information about its
existing customers using cookies, surveys, forms, and data
mining.
Section 22.2 Dealing with Risk
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Risk Management
Tech Terms
data 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
Section 22.2 Dealing with Risk
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End of
Risk Management
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