BUSINESS RISKS

Risk is the possibility of some kind of loss.

Human Risks – are those caused by the actions of individuals, such as employees or customers. (Shoplifting, Employee
theft, Robbery, Credit Card Fraud and Bounced Checks.)

Natural risk – are caused by acts of nature. (Storms, Fires, Floods and Earthquakes.)

Economic Risks – occur because of the changes in the business conditions.

Preparing to Face Risks

As an entrepreneur, you must be prepared to face all kinds of risks. You decide the best strategy for dealing with risks.

How to Prepare for Risks?

1. Determine what can go wrong – as a business owner, the first thing you need to do is conduct a risk assessment,
where it involves looking all aspect of your business and determining the risks you face. During the assessment,
you should:

a. Learn the risks your business faces.

b. Decide how risks would affect your business.

c. Prioritize the risks by the impact they will have on your business.

2. Develop a Plan – once you have identified the risks that could affect your business, you should develop a written
plan for dealing with them.
3. Communicate your Plan – let your managers and employees know about your plan for handling risks. To ensure
your plan is carried out properly, assigned activities and responsibilities to the appropriate people.

TYPES OF THEFT

One of the biggest risks that businesses face is theft. Shoplifters and employees may steal your merchandise. Burglars
may break into your business and steal your equipment. Customer may use stolen credit card or write check they don’t
have money in their account. Once you have identified the theft you face, you can determine what security precautions
you need to take.

Shoplifting:

 Instruct your employees to watch for customers who appear suspicious.

 Hire security guards or off – duty police officers to patrol your store.

 Ask incoming customers to leave their bags behind the counter.

 Install electronic devices, such as mounted video cameras, electronic merchandise tags, point – of – exit sensors,
to detect shoplifters.

Employees Theft:

 Prevent dishonest employees from joining your company.

 Install surveillance system.

 Establish a tough company policy regarding employee theft.

 Be on the lookout.
Robbery:

Almost all business are vulnerable to robberies. You can choose what is considered a safe area of town to locate your
business to guard against being robbed.

 Keep minimal amount of cash in the cash register.

 Once more than a certain amount is received, the cash is transferred to a safe.

 Use surveillance cameras

Credit Card:

If purchase is made on a stolen credit card, a business may not able to collect the money.

 Install an electronic credit authorizer, to see if a credit cared is valid. If the card has been reported stolen or if
the cardholder has exceeded the credit limit, authorization will not be granted.

Bounced Check:

Is a check that bank returns to the payee because the check writer’s checking account has insufficient funds to cover the
amount. Bounced checks are also called Bad Checks.

 Accept checks drawn in local banks only.

 Charge a fee for bad checks

 Ask for identification

CLASSIFICATION OF RISK
As a business owner, you are at risk from more than just criminal activity. A fire could destroy your building. An accident
could injure an employee. A broken water pipe could ruin your inventory. One precaution you can take to protect
against financial loss is to purchase insurance. A payment made to an insurance company to cover the cost of insurance
is a premium.

Business owners face many types of risk. The classifications of risks are based on the result of the risk, controllability of
the risk, and insurability of the risk.

Result of the Risk

Pure Risk – presents the chance of loss but no opportunity for gain.
Example: Accident

Speculative Risk – offers the chance to gain as well as lose from the event or activity.
Example: Investing in the stock market is good chance to make money if the stock price rises. However, if the stock price
falls, you risk the chance of losing money.

Controllability of Risk

Controllable risk is one that can be reduced or possibly even avoided by actions you take. Installing security
system in your business could lessen the risks of your business being robbed. (Human Risk)

Uncontrollable risk is one on which actions have no effect. (Natural risk)

Insurability of Risk
A risk is an insurable risk if it is a pure risk is faced by a large number of people and the amount of the loss can be
predicted. Buildings that house business are susceptible to fire. Nearly all businesses face this risk, and the past statistics
can help insurance companies predict the amount of loss and percentage of business that will suffer fire losses annually.
Insurance companies can sell fire insurance to help their losses. The premiums of all those insured are pooled and used
to help those who incur losses.
If there is a risk that a loss will occur and the amount of the loss cannot be predicted, the risk is uninsurable. An
insurance company would have no way of determining the premiums to charge or the amount of funds to pool to cover
unpredictable losses. A business may move to a new location, and the customers may not follow. The loss of income
that could result cannot be predicted and, thus, is not insurable.

Uninsurable Risks
Sometimes things happen in the business world that are not covered by insurance, which can be very costly to a
business. Insurance does not cover risk that cannot be reasonably predicted or for which the financial loss to the
business cannot be calculated. The risks are tied to economic conditions, consumer demand, competitors’ actions,
technology changes, local factors, and the business operations.

Economic Conditions
Managers must constantly study economic conditions. Changes in economic conditions can result from increase or
decrease in competition, shifts in population, inflation or recession, and government regulations. World events can also
result in economic changes. The terrorist acts of September 11, 2001 caused a dramatic downturn in the U. S. economy,
resulting in major cutbacks and layoffs by businesses. This decreased the amount of disposable income for many
Americans, which resulted in losses for many entrepreneurs. When the economy takes a downward turn, a business
must respond quickly by cutting production and expenses.

Consumer Demand
Business produce products and services that they think consumers want to buy. Business owners must research
consumer needs and wants. If they can predict a change in demand, they may be able to profit by producing and selling
a new product or service. However, if consumer demands change suddenly, the company may end up with products in
its inventory that it cannot sell.

Competitor’s Actions
Business is competitive. As business owner, you must be aware of your competitors and their actions. A major
advertising campaign or a drop in price by your competitors may result in a change in your volume of sales. You must be
ready to respond to actions by your competitors to minimize the risk to your business.

Technology Changes
Changes in technology bring about changes in business. As a business owner, you need to stay up to date on technology
trends. Evaluate new technology and see if it can help your business. Updates to technology can be a major expense but
can alternatively provide efficiencies and help you serve customer better. If customers view your business as out-dated,
you may lose customer loyalty and sales to your competition.

Local Factors
Business can suffer due to activities that occur in their local community. If there is an increase in local taxes or a change
in local business regulations, it can affect your business. If a local government makes improvements to the
infrastructure, such as road or utility improvement, it can help your business in the long term. In short term, it may
result in a loss of business because on-going construction could cause customers to detour around your business.

Business Operation
The management of a business contributes directly to the success or failure of the business. A business that is poorly
managed can have high employee turnover, poor customer service, higher expenses, and other problems. Poorly trained
employees can also cause operational problems. Managers and employees must work together to ensure the success of
the business.

TYPES OF INSURANCE
Purchasing insurance is one of the best ways you can prepare for the unexpected. There are many options for insurance.
You will have to examine the risks you identify and their potential impact on your business to determine if you need to
insure against the risk.

Business Insurance
Insurance companies selling business insurance offers policies that combine protection from all major property and
liability risks in one package. These coverages are also sold separately. Package policies are credited for business that
generally face the same kind and degree of risk. Large companies might purchase a commercial package policy or
customized their policies to meet the special risks they face. Many small and mid – sized businesses purchase a package
known as a business owner’s policy (BOP), which typically includes the following:
  Property insurance – this type of insurance provides coverage for damage to buildings and content inside the
buildings, such as furniture, fixtures, equipment, and merchandise owned by the business.
 Business interruption insurance – this type of insurance covers the loss of income resulting from a fire or other
catastrophe that disrupts the operation of the business. It can also cover the extra expense of operating out of a
temporary location.
 Liability protection – this type of insurance covers your company’s legal responsibility for the harm it may cause
to others as a result of what you and your employees do or fail to do in your business operations. Harm may
involve bodily injury or property damage due to detective product, faulty installations, and errors in services
provided.

BOPs do not cover auto insurance, workers’ compensation, or health and disability insurance. They also do not cover
professional liability, which involves claims of negligent actions by business professionals such as doctors. You will need
separate insurance policies to cover these items.

Life Insurance
Life insurance is paid in the event of the death of the insured. It is intended to provide financial support for families
should the income earner die. A business owner may buy life insurance so that his or her heirs have enough money to
continue the business.

Other Kinds of Insurance

Other types of insurance that you may want to purchase include flood, crime, and renter’s insurance.
Flood protection is not standard with property insurance, so you may have to purchase it separately.
Crime insurance protects against losses resulting from crime, such as robbery, computer fraud, or employee theft.
Renter’s insurance covers the contents owned by the renter inside the leased space. The actual owner of the building
would purchase insurance for the building. Depending on your business and its location, you may or may not decide to
purchase these additional kinds of protection.

Assignment:
You plan to open a horseback riding training center with a horse boarding facility. Make a chart and list the types of
risk you will face. Categorize the risks as human, natural, or economic. Classify risks as controllable or uncontrollable and
insurable or insurable. If the risk is insurable, list the type of insurance that you could purchase to protect against risk.