Risk Management and Types of Risks * 07/16/96 Risk Management and Types of Risks *

Goals: Define Risk and Risk Management * 07/16/96 Goals: 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? * 07/16/96 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. Businesses must manage risks in a way that accommodate public interest, human safety, the environment and state and federal laws. Risk management is necessary for effective financial, marketing, production, and human resource management decisions. Risk management reduces the adverse effects of risk on business resources, cash flow, and profits. *

3 Types Economic Natural Human * 07/16/96 Kinds of Risks 3 Types Economic Natural Human We will go into more detsil over these types of risks over the next three slides. *

* 07/16/96 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 Amt/type - businesses that fail to change products to keep up with o set the standard for competitors. Foreign competition becoming very big lifestyle/pop changes - more single-parent households, dual-income families, delayed marriages, decade trends gov’t - laws requiring a business to pay for street/sewer improvements, parking, or just general maintenance can and will reduce profits. Infl/recession - high unemplyment = reduced product sales. These are all things that are not a direct result of the business but the everything that surrounds the business. There is nothing that a company can do with these risks except adapt *

* 07/16/96 Natural Risks Natural risks are result from natural disasters or disruptions floods tornadoes hurricanes fires droughts lightning earthquakes even sudden abnormal weather conditions Location is about the only thing that can prevent these freak natural disasters. Event though location cannot assure complete safety, it will reduce the risk of encounter some of these disasters. For example, the uncontrollable wildfires that they frequently have in California. They often have numerous deaths and tragedies as a result of the fire. One year the San Diego Chargers could not even play in their stadium because Qualcomm Stadium was housing the majority of the people left homeless by the fire. *

* 07/16/96 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. THIS IS OUR MAIN CONCERN! In a restaurant, this could include food poisoning, ill handled food causing sickness, or loss of product due to food spoilage. In some cases many of the problems lead back to the manager not providing enough/proper training. *

Ways to Handle Business Risks * 07/16/96 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 We will discuss these further over the next 4 slides *

Risk Prevention and Control * 07/16/96 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 Screening - if you train and screen your employees, their incompetence is left in your hands. Providing safe conditions and safety instruction - over $42 bill is lost each year to work-related illnesses and injuries ext theft - $20-30 bill a year lost to ext theft. A variety of things can deter this: proper lighting, encouraging employees to rat out thieves, never leave an employee alone, security guards, etc int theft - security cameras are the best way to prevent this *

Risk Transfer 3 Common Risk Transfers insurance * 07/16/96 Risk Transfer 3 Common Risk Transfers insurance product/service warranties transference through business ownership Next slide *

* 07/16/96 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 Ins policies - most common is the property insurance. This covers loss of, or damage to, buildings, equipment, machinery, merchandise, furniture, and fixtures. Can be for complete replacement value or partial. Define Liable - Business is financially responsible Business Liability - when someone sues a business because the business caused that person or business to suffer a loss, not from personal injury, but from financial injury. There are also bonds that you can purchase Fidelity - protects business from dishonest employees. Usually in banks where tellers are handling money all day. If a bonded employee steals any money, the insurance company pays it back to the bank in full. Performance (surety) - insure against losses that might occur when work or a contract is not finished on time or as agreed Lloyd’s of London had insured some of Michael Jackson’s final concerts. When he passed away, they ended up having to pay out millions to people that had purchased tickets and to venues that had lost revenue. *

Product/Service Warranties * 07/16/96 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 Warranties come in two forms: express and implied Express-one that is explicitly stated in writing or spoken words, to induce a customer to buy Implied - exists automatically due to state law upon purchasing ex) when buying a work truck that will haul a certain load capacity, it is required by the state that it can pull that max load. *

* 07/16/96 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. Sometimes it is impossible to estimate the amount to retain for estimated losses. For example, if a business anticipates a profit by taking a risk on buying a piece of land in hopes that the Atlanta suburbs will grow to the west in the upcoming year, when in fact the growth took a turn and continued north, the business will suffer an underestimated loss. Had the growth continued due west, a large profit would have been made. All businesses assume a certain amount of risk in the running of their business. There is always a certain amount of uncertainty in the decisions made, employee and customer theft and purchases not sold for profit. Companies must take this into consideration and build into their cost calculations a percentage to cover such losses. *

Risk Avoidance Risks can be avoided by advance anticipation * 07/16/96 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 Businesses must plan for a certain amount of risk, but they must analyze the possible risks and avoid risk as much as possible. This is done by watching the market, keeping up with what is happening in the economy and politically that may affect their business. Keeping up with laws that may affect their business. Following market research on their industry and business in general before making a decision so they can make informed decisions and not take unnecessary risks. *

* 07/16/96 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 A plan to analyze the risk the business faces and how the business can manage those risks through risk control and prevention, risk transfer, risk acceptance, and risk avoidance. The plan should be written down and shared with management because they can affect how they do their practices. Businesses need to develop a risk management plan. This plan will analyze the risks the business faces and how the business can handle those risks through risk prevention, risk control, risk transfer, risk avoidance and risk acceptance. This plan should be written down and the most important points that affect employees and the way they do their jobs should be shared with the employees. If the business has specific events that require risk assessment and management, then the business needs to develop a risk management plan for each event. This plan analyzes the specific risks associated with the event and how the business will manage those risks to minimize the risk to the company. The overall company risk management plan must be revisited regularly, at the minimum once per year. Companies need to check for new rules and regulations that affect their business, changes in the business that may need a different type of risk management, and assess whether the current plan is working or needs updating. *