Risks in Business Chapter 19

What is risk Risk is the possibility of loss or failure –Three main types in business EconomicNaturalHuman

Economic Risks Changes in the market that force a lowering of prices, change of products, or failure of business –Competition –Shifts in consumer demands –Obsolescence –Government intervention –Business conditions

Economic risks Are the most difficult to predict and prevent

Natural Risks Those risks that result from natural causes –Tornadoes –Floods –Earthquakes –Lightning –Fires

Human Risks Risks caused by human weakness and/or predictability –Dishonesty –Carelessness –Incompetence –Accidents/illness

Pure Risks Mean that there is a possibility of loss or no loss but not for gain. –Possibility that one of your workers may wreck the company truck –Insurance companies furnish insurance coverage for these risks.

Speculative Risks The risk may result in a loss, no change, or a gain You may risk some of your business’s profits on a new product idea. You may experience a loss, gain, or no change No insurance usually provide no insurance for this type of risk

Four Ways Businesses Handle Risks Preventing or Controlling Risk Transfer Risk Retained Risk Avoidance

Risk Management Reducing the risks associated with marketing decisions –Some examples are?????

Risk Prevention and Control Safety: –Enough aisle space –Safety training (OSHA) –Safety lids –Label warnings –Fire extinguishers –Slippery when wet signs

Burglary Security systems Dead bolt locks Cameras Security bars Security guards

Shoplifters Cameras Ink tags Security people Undercover employees Train employees to watch

Employee Incompetence Screen applicants well at initial interviews Effective training On-going evaluations

Product Selection Choose goods/services needed/wanted by customers Market research

Credit This is where businesses extend credit (extended payment terms –Screen all applicants carefully –Require proper identification –Credit checks

Changes in local area Population trends – area growing or decreasing in size (know the trends) Competition - Know when new competition comes into town and what they are offering

Weather Extremes Lightning rods Storm shelters Snow plows, ice melt

Risk Transfer Contractual Agreements –Guarantees/Warranties –Surety bond – failure of person to do duty (housekeepers and theft) –Rental or lease agreement

Risk Transfer Business Organization –Sole proprietorship: owner has all of the risk –Partnership: the risk is shared among partners –Corporation: Risk limited to investment in business

Transfer risks Insurance –Property –Vehicle –Personal Injury –Product liability

Why are some risks retained? Management unaware of risk Management underestimates risk Risk is small in monetary terms Chance of return or profit

Risk Avoidance Don’t invest in risky ventures Don’t offer products or services that are not a sure thing

Inventory shrinkage Difference between what the company’s inventory records show and what is actually in stock

Ways employees cause inventory shrinkage Making personal use of company property Making recordkeeping errors Making selling mistakes Damaging goods and not reporting Making receiving mistakes Stealing goods from the company

Customers cause inventory shrinkage By shoplifting By breaking items

Vendors cause inventory shrinkage Delivering a short shipment Preparing inaccurate invoices Stealing Failing to give credit for returned goods

Marketing Mix Risks Product – – damage before sold or used (good packaging – poorly designed products, –deterioration (food is dated) –Product liability for loss or damage

Distribution Safety of vehicles Safety of employees – proper lifting Safety of goods – protection against theft

Price Price for product must be a value Not price too high (lose sales) Not price too low (lose profit)

Promotion Effectively reach target market Information must be honest and accurate Other business’s misleading people about your products/services