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Risk Management and Types of Risks. By Tony Collins Edited by Memory Reed. 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
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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