1. Business Risk

2. Business Risk Businesses can lose just as people can
You go to the barbershop for a haircut, you risk wasting your money on a disappointing cut
The barbershop, on the other hand, risks losing the resources it has invested if you demand a refund
If you share your dissatisfaction with other members of the community, the barbershop risks losing additional customers

3. Definition
Business risk is the probability of loss (failure) or gain (success) inherent in conducting business
Although business risk can include the possibility of gain, the chance of gaining is never separate from the possibility of losing (hence, the risk)
With free enterprise, business people have the right to risk everything: they can lose it all or they can make a fortune
Effectively managing risk helps a business to be successful

4. Business Risk
Businesses need to know the risks they might face – and what influences those risks
Classifications of risk
Economic risks
Changes in the market that cause prices to go up or down, products to change, and businesses to succeed or fail
Can happen when customers select (or change their minds about) what they want to buy

5. Economic Risk Types of economic risks Competition
The economic risks involved in keeping up with (and outperforming) business competitors are significant

6. Economic Risk Shifts in Consumer Demand
Sometimes, customers’ needs and wants change

7. Economic Risk Obsolescence
Advances in technology play an important role in economic risk

8. Economic Risk Government intervention
Revenues – and profits – are affected by what governments require

9. Economic Risk Business conditions
The environment within which a business operates can affect it economically, on a large or small scale

10. Natural Risk
Natural risks - Result from natural causes such as floods, tornadoes, fires, lightning, blizzards, and earthquakes
Weather conditions are a natural risk for many products and businesses
Specific weather conditions can affect certain geographic area more than others
Another natural risk is perishability
Fresh produce and other perishable goods will eventually rot or spoil – some faster than others

11. Human Risk
Human risk - Caused by human weakness and the unpredictability of employees and/or customers
Most common types of human risk
Dishonesty
Carelessness
Incompetence
Possibility of accident or illness

12. Pure Risk & Speculative risks
Distinguishing between pure risks and speculative risks
All businesses risks are either pure or speculative risks
Pure risks bring the possibility of loss or no loss
A tornado may or may not strike your building
Speculative risks bring the possibility of loss, no change, or gain
Operating a business results in earning money, breaking even, or going bankrupt
Although businesses can buy insurance for pure risks, insurance companies do not insure speculative risks
Because of this, businesses regularly encounter risks that cannot be insured against

13. Pure vs. Speculative Risk
Businesses go forward with a risky action if it’s worth the risk
When businesses proceed with a risky action, they handle the risks involved in one of four basic ways
Avoiding risk
Preventing/controlling risk – safety, security, employee incompetence, product selection, credit
Changes – population trends, political events
Weather extremes – hurricanes

14. Risk-transfer Methods
Transferring risk
Certain risks may be reduced or eliminated by transferring (or shifting) those risks to another person or business
This option enables businesses to move forward with their decisions without bearing the risks involved
These businesses use a risk-transfer method such as:
Entering into a contract – an agreement between two or more people of businesses; on party provides the product, the other pays something in return

15. Risk-transfer Methods
Common contractual agreements for transferring risk are:
Guarantees/warranties
Surety bonds
Rental agreements
PoB

16. Risk-transfer Methods
Selecting a particular form of business ownership – how the business is organized can affect the risks that business owners bear
Three types of business ownership - Sole proprietorship, Partnership, Corporation

17. Risk-transfer Methods
Purchasing insurance – probably the most frequently used option for transferring risk; examples of insurance are:
Property
Transportation
Robbery or theft
Personal injury

18. Retaining Risk
Retaining risk – in some instances, businesses may keep, or retain, the risk involved in doing business
Some businesses may do nothing to reduce or eliminate a risk business the business:
Is unaware of the risk
Underestimates the risk
Feels the risk is too small
Believes there’s a chance of return