22
Risk
Management
Section
22.1
Identifying Business Risks
Section
22.2
Dealing with Risk
Glencoe Entrepreneurship: Building a Business
SECTION
22.1
Identifying Business
Risks
Section Objectives
•
•
•
Explain why risk is inevitable.
Describe speculative risk.
Describe three categories of pure risk.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.1
Identifying Business
Risks
The Main Idea
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.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.1
Identifying Business
Risks
Content Vocabulary
speculative risk
pure risk
burglary
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
robbery
electronic credit card authorizer
negligence
SECTION
22.1
Identifying Business
Risks
Risk Is Inevitable
Every business faces risk—the possibility of loss or injury.
Business risks fall into two general categories:
•
•
speculative risk
pure risk
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.1
Identifying Business
Risks
Speculative Risk
Most business decisions,
such as marketing a new
product, involve
speculative risk.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
speculative risk
risk that is inherent to a business,
involving the chance of either
profit or loss
SECTION
22.1
Identifying Business
Risks
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.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
pure risk
the threat of a loss to a business
without any possibility of gain,
such as robbery or employee theft
SECTION
22.1
Identifying Business
Risks
Pure Risk
The three categories of pure risk are:
•
•
•
Crime
Natural disasters
Accidents
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.1
Identifying Business
Risks
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
bad checks
counterfeit money
cyber crime
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.1
Identifying Business
Risks
Shoplifting
Techniques to reduce shoplifting include:
•
•
•
•
•
Train employees to recognize shoplifters.
Keep the store well lit and merchandise visible.
Employ two-way mirrors, peepholes, or closed-circuit TV.
Use tamper-proof price tickets or electronic tags.
Hire a uniformed security guard.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.1
Identifying Business
Risks
Employee Theft
Ways to discourage employee theft include:
•
•
•
•
Establish policies and communicate them verbally and in writing.
Lock up all doors that do not need to be used for entry or exit.
Watch your trash for stolen items.
Control the distribution of keys and other security devices.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.1
Identifying Business
Risks
Burglary
The problem of burglary is
growing, but there are ways
for business owners to
minimize their risks.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
burglary
the act of breaking into and
entering a building with the intent
to commit a felony (a serious
crime)
SECTION
22.1
Identifying Business
Risks
Robbery
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.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
robbery
the taking of property by force or
threat, usually by means of a
weapon
SECTION
22.1
Identifying Business
Risks
Stolen Credit Cards
Since credit cards can be a
source of financial loss to a
business, an electronic
credit card authorizer
machine can be a valuable
tool.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
electronic credit card authorizer
a machine that verifies whether a
credit card is good (that is, not
stolen or invalid)
SECTION
22.1
Identifying Business
Risks
Natural Disasters
Many owners suffer losses not only from crime, but from natural
disasters such as fires, earthquakes, tornadoes, and floods.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.1
Identifying Business
Risks
Natural Disasters
You can protect your business against fire by installing smoke
detectors and sprinkler systems. Protect your cash and documents
by storing them in a fireproof safe.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.1
Identifying Business
Risks
Accidents and Injury
Accidents, another risk
businesses face, can be
financially devastating if a
small business is held
responsible for negligence.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
negligence
the failure to exercise reasonable
care
SECTION
22.1
Identifying Business
Risks
After You Read
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.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.1
Identifying Business
Risks
After You Read
2.
Describe speculative risk.
Speculative risk involves taking a chance for profit or loss; the risk
is inherent to the business.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.1
Identifying Business
Risks
After You Read
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.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.2
Dealing with
Risk
Section Objectives
•
•
•
•
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.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.2
Dealing with
Risk
The Main Idea
It is impossible to completely protect your business from pure risks, but
you can lessen their impact through risk management and planning.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.2
Dealing with
Risk
Content Vocabulary
premium
business interruption insurance
casualty insurance
errors-and-omissions insurance
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
product liability insurance
fidelity bonds
performance bonds
workers’ compensation
SECTION
22.2
Dealing with
Risk
Risk Management Strategies
Risk management, preventing or reducing business loss, involves
three stages:
1.
2.
3.
Identify the risks.
Estimate potential losses.
Determine the best way to deal with each risk.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.2
Dealing with
Risk
Risk Management Strategies
Managing risk involves these strategies:
•
•
•
•
risk avoidance
risk reduction
risk transfer
risk retention
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.2
Dealing with
Risk
Risk Reduction
Business owners should take these steps to reduce risk:
•
•
•
•
Design work areas to lower the chance of accidents or fire.
Communicate with and educate employees on safety practices.
Check and service safety equipment.
Test company products under the most extreme conditions in
which they will be used.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.2
Dealing with
Risk
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.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
premium
the price of insurance a person or
business pays for a specified risk
for a specified time
Risk Transfer
Four Types of Business Insurance
Property
Insurance
Casualty
Insurance
Life
Insurance
Workers’
Compensation
Insurance
28
SECTION
22.2
Dealing with
Risk
Risk Transfer
Business interruption
insurance allows a
business owner to continue
paying important expenses
if the business is shut down
due to property damage.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
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
SECTION
22.2
Dealing with
Risk
Risk Transfer
If a customer is injured on
your business premises,
casualty insurance will
offer you protection.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
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
SECTION
22.2
Dealing with
Risk
Risk Transfer
Companies that advertise
can protect themselves by
purchasing errors and
omissions insurance.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
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
SECTION
22.2
Dealing with
Risk
Risk Transfer
Manufacturers can protect
themselves by purchasing
product liability
insurance.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
product liability insurance
insurance coverage that protects
a business from injury claims that
result from use of the business’s
products
SECTION
22.2
Dealing with
Risk
Risk Transfer
Fidelity bonds and
performance bonds are
types of casualty insurance.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
fidelity bondsbonds
performance
insurance
a
form of insurance
coverage that
that protects
protects a
company
a
businessinifcase
workoforemployee
a contract is
theftfinished on time or as agreed
not
SECTION
22.2
Dealing with
Risk
Risk Transfer
Business owners are
required to provide
workers’ compensation
insurance for their
employees.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
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
SECTION
22.2
Dealing with
Risk
Choosing Safety and Security Precautions
Security measure options include:
•
•
•
•
secure doors and windows
burglar alarm systems
panic buttons
card-access systems
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
•
•
•
•
closed-circuit TV monitors
fire alarms
smoke detectors
sprinkler systems
SECTION
22.2
Dealing with
Risk
Planning for Emergencies
Your risk management objective should be to have procedures in
place before a crisis occurs.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.2
Dealing with
Risk
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 on a regular basis.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.2
Dealing with
Risk
After You Read
1.
List the four risk management strategies
The four risk management strategies are risk avoidance, risk
reduction, risk transfer, and risk retention.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.2
Dealing with
Risk
After You Read
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.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.2
Dealing with
Risk
After You Read
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.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
SECTION
22.2
Dealing with
Risk
After You Read
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.
Chapter 22 Risk Management
Glencoe Entrepreneurship: Building a Business
22
Risk
Management
End of
Chapter 22
Section
22.1
Identifying BusinessRisk
Risks
Management
Section
22.2
Dealing with Risk
Glencoe Entrepreneurship: Building a Business