Understanding Business Risks and Mitigation Strategies

2. Section Objectives • Explain why risk is inevitable. • Describe speculative risk. • Describe three categories of pure risk.

3. 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.

4. Content Vocabulary speculative risk pure risk burglary robbery electronic credit card authorizer negligence

5. Risk Is Inevitable Every business faces risk—the possibility of loss or injury. Business risks fall into two general categories: • speculative risk • pure risk

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

7. 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 risk the threat of a loss to a business without any possibility of gain, such as robbery or employee theft

8. Pure Risk The three categories of pure risk are: • Crime • Natural disasters • Accidents

9. 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

10. 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.

11. 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.

12. Burglary The problem of burglary is growing, but there are ways for business owners to minimize their risks. burglary the act of breaking into and entering a building with the intent to commit a felony (a serious crime)

13. 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. robbery the taking of property by force or threat, usually by means of a weapon

14. 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. electronic credit card authorizer a machine that verifies whether a credit card is good (that is, not stolen or invalid)

15. Natural Disasters Many owners suffer losses not only from crime, but from natural disasters such as fires, earthquakes, tornadoes, and floods.

16. 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.

17. Accidents and Injury Accidents, another risk businesses face, can be financially devastating if a small business is held responsible for negligence. negligence the failure to exercise reasonable care

18. 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.

19. After You Read 2. Describe speculative risk. Speculative risk involves taking a chance for profit or loss; the risk is inherent to the business.

20. 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.

21. 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.

22. 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.

23. Content Vocabulary premium business interruption insurance casualty insurance errors-and-omissions insurance product liability insurance fidelity bonds performance bonds workers’ compensation

24. 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.

25. Risk Management Strategies Managing risk involves these strategies: • risk avoidance • risk reduction • risk transfer • risk retention

26. 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.

27. 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

28. Risk Transfer Four Types of Business Insurance Property Insurance Casualty Insurance Life Insurance Workers’ Compensation Insurance 28

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. Choosing Safety and Security Precautions 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

36. Planning for Emergencies Your risk management objective should be to have procedures in place before a crisis occurs.

37. 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.

38. 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.

39. 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.

40. 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.

41. 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.

42. End of Chapter 22 RiskManagement