Risk Management Unit 8

Dealing with Business Risks Risk: the possibility of some kind of loss Categorize Risks ▫Human risks: those caused by the actions of individuals (employees or customers)  Shoplifting, employee theft, robbery, credit car fraud, and bounced checks ▫Natural risks: caused by acts of nature  Storms, fires, floods, and earthquakes ▫Economic risks: occur because of changes in business conditions  Political instability, increased competition, and inflation

Prepare to Face Risks Risk Management: taking action to prevent or reduce the possibility of loss to your business ▫You can avoid risk…  Halting production of a product you believe will not meet mark needs ▫You can assume risk…  If you determine the risk is low, you may continue developing the product if your market research predicts it to be successful with the target market ▫You can transfer the risk…  Protect yourself against the financial losses from some risks by purchasing insurance

Plan of Action Determine what can go wrong: ▫Conduct a risk assessment—involves looking at all aspects of your business and determining the risks you face ▫During the assessment, you should do the following:  Learn the risks your business faces  Decide how the risks would affect your business  Prioritize the risks by the impact they will have on your business

Develop a Plan There are many good sources available to help you establish an effective risk management plan The following items should be included: ▫Chain-of-command information ▫Name of individuals responsible for assessing the degree of risk to life and property ▫The preferred method for reporting fires and other emergencies ▫Specific instructions for shutting own equipment and other business activities ▫Facility evacuation procedures, including maps showing the best and alternate exit routes ▫Specific training for those who are responsible for responding to emergencies

Communicate Your Plan Let your managers and employees know about your plan for handling risks ▫To ensure your plan is carried out properly, assign activities and responsibilities to the appropriate people ▫To address the risks related to emergencies, provide training to all employees to show them what to do in the event of any type of emergency

Types of Theft Shoplifting: the act of knowingly taking items from a business without paying ▫This is a problem in virtually every type of retail business ▫Take steps to prevent or reduce shoplifting:  Instruct your employees to watch for customers who appear suspicious  Hire security guards or off-duty police officers to patrol your store  Post signs indicating that you prosecute shoplifters  Ask incoming customers to leave their bags behind the counter  Install electronic devices

Types of Theft Employee Theft ▫Office supplies, equipment, merchandise, money ▫Take steps to prevent the problem and know how to detect the problem and handle it appropriately ▫Adopt the following procedures:  Prevent dishonest employees form joining your company  Install surveillance systems  Establish a tough company policy regarding theft  Be on the lookout

Types of Theft Robbery ▫Preventative measures include:  Locating your business in a “safe area” of town  Install deadbolt locks and burglar alarms  Keep the outside of the business well lit at night  Keep a minimal amount of cash in the register Credit Card Fraud ▫If a purchase is made on a stolen credit card, a business may not be able to collect the money ▫Preventative measures include:  Install an electronic credit authorizer

Types of Theft Bounced Checks ▫A check that the bank returns to the payee (person or business to whom the check is made payable  Because the check writer’s checking account has insufficient funds to cover the check amount ▫Minimize losses by:  Accepting checks drawn on in-state banks  Charge a fee for bad checks  Ask for identification  Don’t accept checks at all

Question You own a pizza shop. You suspect that one of your delivery people is charging customers more than what they actually owe and keeping the difference. How would you handle the situation?

Insure Against Risks

Result of the Risk A pure risk presents the chance of loss but no opportunity for gain ▫Example: when a vehicle goes out on the road, the risk is an accident A speculative risk offers you the chance to gain as well as lose from the event or activity ▫Example: investing in the stock market

Controllability of the Risk A controllable risk is one that can be reduced or possibly even avoided by actions you take ▫Example: installing a security system An uncontrollable risk is one on which actions have no effect ▫Example: the weather

Insurability of the Risk A risk is an insurable risk if it is a pure risk faced by a large number of people and the amount of the loss can be predicted ▫Example: loss due to a building fire ▫Insurance companies can sell fire insurance  Businesses will pay a premium to cover the cost of insurance An uninsurable risk is a risk that a loss will occur and the amount of the loss cannot be predicted ▫Example: moving to a new location and customers may not follow

Uninsurable Risks Economic Conditions ▫Changes can result form an increase or decrease in competition, shifts in population, inflation or recession, and government regulations ▫World events can also result in economic changes Consumer Demand ▫Researching consumer needs and wants  Example: holiday products Competitors’ Actions ▫Being aware of your competitors

Uninsurable Risks Technology Changes ▫Evaluating new technology and seeing if it can help your business Local Factors ▫Increases in local taxes or a changes in local business regulations  Example: improvements to infrastructures Business Operations ▫Management contributes directly to its success or failure  Poorly managed business may have high employee turnover, poor customer service, higher expenses, poorly trained employees

Types of Insurance Business Insurance ▫Property Insurance  Damage to buildings and the contents inside the buildings (furniture, fixtures, equipment, merchandise) ▫Business Interruption Insurance  Loss of income resulting from a fire or other catastrophe that disrupts business operations  Can also cover the extra expense of operating out of temporary location ▫Liability Protection  Legal responsibilities for the harm it may cause to others as a result of what you/employees do or fail to do in your business operations

Types of Insurance Life Insurance ▫A business owner may buy life insurance so that his/her heirs have enough money to continue the business Other Kinds of Insurance ▫Flood Insurance  Not standard with property insurance ▫Crime Insurance  Robbery, computer fraud, or employee theft ▫Renters Insurance  Covers contents owned by the renter inside the leased space

Other Risks

Risks of Credit Credit makes it possible for business owners to make costly purchases Extending credit to customers can help increase business sales ▫Credit lines and the use of credit cards Types of credit: ▫Trade credit ▫Consumer credit

Trade Credit When a business allows another business to buy now and pay later ▫Many purchases a business owner will make from other businesses will be made with trade credit ▫As a business owner, you will need to be sure you have the money to cover your debts when they are due  This will protect your credit record

Consumer Credit When a retail business allows its customers to buy merchandise now and pay for it later ▫Offered in two basic forms: loans and credit cards  A loan gives the individual a lump sum of money to spend and pay back over time with interest  Installment loans  Most credit cards are considered unsecured loans  When a business offers its own credit card to customers, it will not receive payment for a month or more after the sale is made

Credit Policies Policies must be established to help reduce risks ▫Should specify to whom credit will be extended, what products may be purchased on credit, and what the terms of the credit will be Most businesses offering credit cards to consumers have them complete a credit application ▫Some things to consider in determining who is creditworthy:  Previous credit history  Employment record  Assets owned  Money available for making payments  checking and savings accounts  Financial references

Risks on the Job Some of the most dangerous occupations in America include: ▫Fishers, loggers, aircraft pilots, construction workers, farmers and ranchers, roofers, and garbage collectors  Other occupations may have health and safety risks associated with them  Repetitive stress injuries result from performing the same activity repeatedly for long periods of time

Workers’ Compensation An insurance program that provides coverage to employees who suffer work-related injuries or illness ▫Laws vary from state to state but generally provide:  For the payment of medical bills  A percentage of lost wages  Vocational retraining if an employee is unable to resume his/her former job ▫Will also pay a death benefit to compensate survivors if an on-the-job injury results in the death of a worker

Coverage Provided If an employee is out of work for more than a few days, a percentage of lost wages may also be covered ▫Lost wage payments are usually about 2/3 of the employee’s income If an employee is left permanently disabled from a work-related injury, ▫The employee may be eligible for a lump-sum payment or long-term benefits  This depends on whether the employee can perform other work that pays as well as the former position

Injuries Not Covered Injuries individuals afflict on themselves Injuries suffered under the influence of alcohol or illegal drugs Injuries suffered during a fight that the injured employee started Injuries suffered while disobeying orders or violating employer policy Injuries suffered while committing a crime Injuries suffered while not on the job

Filing a Claim The injured employee must notify the employer ▫Depending on the state, there might be a time limit for reporting an accident or illness The employee must follow doctor’s orders ▫It could be grounds for denying workers’ compensation coverage if they don’t  The employee might have to go to a particular doctor The employee must file the claim ▫The employer must provide the employee with the proper forms, but it is the employee’s responsibility to file the claim

Risks in International Business

Challenges with International Business You may not speak the language of the countries you are targeting ▫Misunderstanding are likely to occur You may not be familiar with the laws, customs, and cultures of foreign countries ▫If you fail to recognize the cultural differences, you risk offending those with whom you are trying to do business You may have to change your products or services to meet the needs of global trade You will have to deal with different currency systems ▫Knowing the exchange rate—which changes daily and is affected by supply and demand Your travel and shipping expenses may be high

Strategies for Dealing with International Markets Seek gov’t assistance to answer your questions about international business Conduct business in many different countries Work with local business partners Comply with international labor standards Employ local management Learn about the other country’s culture

Activity You make and sell jewelry and watches for both men and women. You are ready to expand your business globally. Choose a country in which you would like to compete and research it. ▫What aspects of the country’s culture could affect your business? ▫What is the value of that country’s currency in relation to the U.S. currency? ▫How will this affect your business? ▫Will you need to make modifications to your products in order to sell them in that country? ▫Explain how your products will compete in this marketplace