Chapter 22

2. Chapter 22 Risk Management Identifying Business Risks 22.1 Dealing with Risk 22.2

3. 22.1 • Explain why risk is inevitable. • Describe speculative risk. • Describe three categories of pure risk. Section 22.1 Identifying Business Risks

4. 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

5. 22.1 speculative risk pure risk burglary robbery electronic credit authorizer negligence Section 22.1 Identifying Business Risks

6. 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

7. Speculative Risk Most business decisions, such as marketing a new product, involve speculative risk. speculative riskrisk that is inherent to a business, involving the chance of either profit or loss Section 22.1 Identifying Business Risks

8. 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. pure riskthe threat of a loss to a business without any possibility of gain, such as robbery or employee theft Section 22.1 Identifying Business Risks

9. Pure Risk The three categories of pure risk are: • Crime • Natural disasters • Accidents Section 22.1 Identifying Business Risks

10. 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

11. 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

12. 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

13. Crime The problem of burglary is growing, but there are ways for business owners to minimize their risks. burglarythe act of breaking into and entering a building with the intent to commit a felony (a serious crime) Section 22.1 Identifying Business Risks

14. 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. robberythe taking of property by force or threat, usually by means of a weapon Section 22.1 Identifying Business Risks

15. Crime Since credit cards can be a source of financial loss to a business, an electronic credit authorizer machine can be a valuable tool. electronic credit authorizera machine that verifies whether a credit card is good, that is, not stolen or invalid Section 22.1 Identifying Business Risks

16. 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

17. 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

18. Accidents and Injury Accidents, another risk businesses face, can be financially devastating if a small business is held responsible for negligence. negligencethe failure to exercise reasonable care Section 22.1 Identifying Business Risks

19. 22.1 • 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

20. 22.1 • 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

21. 22.1 • 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

22. 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

23. 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

24. 22.2 premium business interruption insurance casualty insurance errors-and-omissions insurance product liability insurance fidelity bonds performance bonds workers’ compensation independent insurance agent direct insurance writer Section 22.2 Dealing with Risk

25. Risk Management Strategies Risk management, preventing or reducing business loss, involves three stages: • Identify the risks. • Estimate potential losses. • Determine the best way to deal with each risk. Section 22.2 Dealing with Risk

26. Risk Management Strategies Managing risk involves these strategies: • risk avoidance • risk reduction • risk transfer • risk retention Section 22.2 Dealing with Risk

27. 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

28. 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. premium the price of insurance a person or business pays for a specified risk for a specified time Section 22.2 Dealing with Risk

29. Risk Transfer Four Types of Business Insurance Property Insurance Casualty Insurance Life Insurance Workers’ Compensation Insurance Section 22.2 Dealing with Risk 29

30. Risk Transfer Business interruption insurance allows a business owner to continue paying important expenses if the business is shut down due to property damage. 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

31. Risk Transfer If a customer is injured on your business premises, casualty insurance will offer you protection. 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

32. Risk Transfer Companies that advertise can protect themselves by purchasing errors-and omissions insurance. 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

33. Risk Transfer Manufacturers can protect themselves by purchasing product liability insurance. 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

34. 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

35. Risk Transfer Business owners are required to provide workers’ compensation insurance for their employees. 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

36. 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

37. Choosing Security Measures Security measure options include: • secure doors and windows • burglar alarm systems, • panic buttons • card-access systems • closed-circuit TV monitors • fire alarms • smoke detectors • sprinkler systems Section 22.2 Dealing with Risk

38. Planning for Emergencies Your risk management objective should be to have procedures in place before a crisis occurs. Section 22.2 Dealing with Risk

39. 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

40. 22.2 • 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

41. 22.2 • 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

42. 22.2 • 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

43. 22.2 • 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

44. 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 44

45. 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 45

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