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Chapter 18 - Risk Management

Risk management involves identifying risks, estimating potential losses, and determining strategies to deal with risks. There are two categories of risk - speculative risks which involve potential for profit or loss, and pure risks which only pose the threat of loss. Common pure risks for businesses include crime, natural disasters, and accidents. Insurance is a key strategy to transfer some risk to insurance companies in exchange for premium payments. Other strategies include risk avoidance, reduction, and retention. Proper planning and security measures can help businesses manage various risks.

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Fatima Chowdhury
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107 views

Chapter 18 - Risk Management

Risk management involves identifying risks, estimating potential losses, and determining strategies to deal with risks. There are two categories of risk - speculative risks which involve potential for profit or loss, and pure risks which only pose the threat of loss. Common pure risks for businesses include crime, natural disasters, and accidents. Insurance is a key strategy to transfer some risk to insurance companies in exchange for premium payments. Other strategies include risk avoidance, reduction, and retention. Proper planning and security measures can help businesses manage various risks.

Uploaded by

Fatima Chowdhury
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Risk Management

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.
Risk Management

speculative robbery
risk electronic credit
pure risk authorizer
burglary negligence
Risk Is Inevitable

Every business faces risk—the possibility of


loss or injury.
 
Business risks fall into two general categories:

speculative risk
pure risk
Speculative Risk

Most business decisions, speculative risk risk


such as marketing a new that is inherent to a
business, involving
product, involve the chance of either
speculative risk. profit or loss
Pure Risk

A natural disaster, such pure risk the threat


as a flood, or an accident of a loss to a business
without any possibility
involving a customer or of gain, such as
an employee is a pure robbery or employee
risk for a business owner. theft
Pure Risk

The three categories of pure risk are:

Crime
Natural disasters
Accidents
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
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.
Crime

The problem of burglary burglary the act of


is growing, but there are breaking into and
entering a building
ways for business owners with the intent to
to minimize their risks. commit a felony (a
serious crime)
Crime

It is the business owner’s robbery the taking of


responsibility to protect property by force or
threat, usually by
employees and customers means of a weapon
from crimes such as
robbery by letting the
robber take what he or
she wants.
Crime

Since credit cards can be electronic credit


a source of financial loss authorizer a machine
that verifies whether a
to a business, an credit card is good,
electronic credit that is, not stolen or
authorizer machine can invalid
be a valuable tool.
Natural Disasters

Many owners suffer losses, not only from


crime, but from natural disasters, such as
fires, earthquakes, tornadoes, and floods.
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.
Accidents and Injury

Accidents, another risk negligence the


businesses face, can be failure to exercise
reasonable care
financially devastating if a
small business is held
responsible for negligence.
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.
Risk Management Strategies

Managing risk involves these strategies:

risk avoidance
risk reduction
risk transfer
risk retention
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.
Risk Transfer

A third strategy—risk premium the price of


transfer—means buying insurance a person or
business pays for a
insurance and paying a specified risk for a
premium to cover any specified time
losses, which transfers
some of your risk to an
insurance company.
Risk Transfer
Four Types of Business Insurance

Property Casualty
Insurance Insurance

Workers’
Life
Compensation
Insurance
Insurance

19
Risk Transfer

Business interruption business interruption


insurance allows a insurance insurance
coverage against
business owner to potential losses that
continue paying important result from having to
expenses if the business close a business for
insurable reasons;
is shut down due to
insurance pays net
property damage. profits and expenses
while a business is shut
down for repairs or
rebuilding
Risk Transfer

If a customer is injured on casualty insurance


your business premises, insurance coverage for
loss or liability arising
casualty insurance will from a sudden,
offer you protection. unexpected event such
as an accident and for
the cost of defending a
business in court
against claims of
property damage
Risk Transfer

Companies that advertise errors-and-omissions


can protect themselves by insurance insurance
coverage for any loss
purchasing errors-and sustained because of
omissions insurance. an error or oversight on
a business’s part, such
as a mistake in
advertising
Risk Transfer

Manufacturers can protect product liability


themselves by purchasing insurance insurance
coverage that protects
product liability a business from injury
insurance. claims that result from
use of the business’s
products
Risk Transfer

Business owners are workers’ compensation


required to provide insurance insurance
that is required by the
workers’ compensation government and paid
insurance for their for by employers to
employees. provide medical and
income benefits to
employees injured on
the job, or for job-
related illnesses
Selecting an Insurance Agent

A business owner can independent insurance


purchase insurance from agent an insurance
agent, usually local,
an independent insurance who represents
agent or a direct insurance multiple insurance
writer. companies

direct insurance writer


an insurance agent who
works for one
particular insurance
company, such as life
and automobile
companies
Choosing Security Measures

Security measure options include:

secure doors and closed-circuit TV


windows monitors
burglar alarm fire alarms
systems, smoke detectors
panic buttons sprinkler systems
card-access systems
Planning for Emergencies

Your risk management objective should be to


have procedures in place before a crisis occurs.
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
Product Risk Probability Impact
•The technology doesn’t functionally perform as expected
•Product development is late
•Core technology becomes obsolescent
•Product failure rates are too high

Financial Risk Probability Impact


•It takes longer to raise funds than expected
•Operational cash burn is higher than budgeted
•Revenues stay too long in receivables
•Core technology prices increase

Market Risk Probability Impact


•Competitors release superior or earlier product
•Competitors gain control of the target customers
•Competitors claim IP infringement

Operational Risk Probability Impact


•Key staff leave
•Product delivery dates are missed
•IT systems fail

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