8.01 Summarize the concept of risk management

Risk Possibility of a financial loss or failure Individuals or companies willing to take risk because of opportunity for success or financial gain

3 Most common risks for a business 1.Economic 2.Natural 3.Human

1. Economic risk Risk associated with the possibility of loss due to a change in the economy A business might experience monetary loss due to changes in overall business conditions

Economic risk involves…  Competition  Changing consumer lifestyles  Inflation  Population changes  Limited usefulness or popularity of some products  Obsolescence  Government regulation  Recession

Examples of economic risk: Carolina Hurricanes, Carolina Cobras, and NC State basketball team all played at RBC Center in Raleigh Carolina Cobras moved to Charlotte to increase opportunity to make profit

2. Natural risk Risk associated with possibility of loss due to natural causes

Natural risk involves… Drought Earthquakes Hurricanes Tornadoes Lightning Fires Other unexpected changes in normal weather conditions

Example of natural risk Lubbock Texas, 2002, Brittany Spears concert was cancelled due to power outage from a storm

3. Human risk Risk associated with the possibility of loss due to human factors.

Human risk Risks affiliated with employees or endorsers might include dishonesty, incompetence, accidents, illness or negligence

Examples of human risk: Customer unpredictability Employee unpredictability Human mistakes including dishonesty, fraud, accidents Lowes Motor Speedway removed first 2 rows of seats on front stretch to protect fans from flying debris

Risk management The management, control, and prevention of exposure to internal or external risks

Risk management plan Outlines procedures for handling all forms of business risk

Risk management plan Important considerations to be included in a plan: 1.Identify the potential business risks 2.Measure the prioritize business risks 3.Determine how to effectively handle each risk 4.Implement risk management plan

Risk prevention Involves dealing with risks before they occur

Risk prevention involves: 1.Screening potential employees Interviews and aptitude tests are the two most common ways businesses screen employees

Risk prevention involves: 2.Training and orienting new employees to company polices and procedures

Risk prevention involves: 3.Providing safe conditions and safety instructions for employees Proper safety instruction can reduce the possibility of on-the- job accidents

Risk prevention involves: 4.Preventing external theft Shoplifting is stealing merchandise for a business Robbery is stealing merchandise or money through the use of force or threat

Risk prevention involves: 5.Preventing internal theft Dishonest employees could steal merchandise (larceny) or money (embezzlement) from a company

Risk transfer Involves passing risk

Risk transfer accomplished by: 1.Purchasing insurance against a potential loss. Examples include property, liability, business interruption, and income insurance.

Risk transfer accomplished by: 2.Using warranties to transfer risk to manufacturer A warranty is a written guarantee that a product or service will meet certain quality standards

Risk transfer accomplished by: 2.Warranties (con’t) If product or service does not meet the expectations of consumer, or if product fails, manufacturer is held responsible Most warranties have specific time or use limits

Risk transfer accomplished by: 3.Business ownership Type of business determines how much risk is incurred by each owner In a sole proprietorship or partnership, all risks assumed by individual owners

Risk transfer accomplished by: 3.Business ownership (con’t) In contrast, a corporation distributes risk among all of its shareholders.

Risk retention Involves assuming or acknowledging a business risk and outcome Some risks are inevitable or uncontrollable Some risks cannot be transferred, avoided, insured or prevented

Risk avoidance  May be achieved by anticipating business risk and preparing for risk in advance  Avoid opportunities or investments that have potentially high risk  Pursue an option or strategy that involves less risk