BUSINESS RISK MANAGEMENT

Business Risk Business risk is a situation that can lead to financial gain, loss, or failure. A business cannot eliminate all risk, but they can use their planning skills to reduce and manage their risks.

Risk Management According to the American Risk and Insurance Association, risk management is the systematic process of managing an organization’s risks to achieve objectives in a manner consistent with public interest, human safety, environmental needs, and the law.

Types of Business Risk Economic Risks—risks that result from changes in overall business conditions. Level or type of competition, Changing consumer lifestyles, Population changes, Limited usefulness or style of some products, Product obsolescence, Government regulation, Inflation, or Recession Failure to keep up with competition may lead to lost sales and economic risks. Consumer lifestyles and population changes are other economic risks facing modern businesses if they fail to adapt goods or services to meet customers’ changing interests and needs. When a new product is hipper, faster, more convenient, or more efficient than its earlier versions, the older product becomes obsolete.

Types of Business Risk Natural Risks—risks that are caused by natural occurrences. They can result in loss or damage of property and may cause a business to shut down for a period of time. Floods, Tornadoes, Hurricanes, Fires, lightning, Droughts, and Earthquakes Some risks that are caused by people are also natural risks: power outages, civil unrest, oil spills, arson, terrorism, and even war are classified as natural risks. Insurance policies may not cover damage caused by acts of war or riots. Weather is an example of a natural risk. Some businesses and products depend on predictable weather for success. Ski resorts depend on normal snowfall levels to operate ski lifts, sell lodging, and ski packages, and fill restaurants. A mild winter season can result in lost revenue.

Types of Risk Human Risk—risks caused by employee dishonesty, errors, mistakes, and omissions as well as the unpredictability of customers or the workplace itself. Internal and Customer Theft Overall theft represented 1.51 percent of retail sales and continues to grow every year. Employee theft represents the largest share of retailer unexplained losses. The most common employee theft includes not processing transactions or not scanning items for people at cash registers. Customer theft is a loss caused by shoplifting, fraudulent activities, or nonpayment. The National Retail Federation has estimated that shoplifting alone adds 3 to 4 percent to the cost of each product just to cover losses. Employee Risks—employees engaging in fraudulent or improper business practices. Skills and Working Environment Many companies create safety programs that stress the importance of proper procedures.

Types of Business Risk Computer-Related Crime Cybercrime has emerged as a significant new risk for businesses. Employees who use their company’s network to visit untrusted Web sites can mistakenly download “malware,” or malicious computer software. Computer crime is committed by many kinds of people, from current or past employees to professional gangs of cyber-thieves. Protecting a business from computer crime requires a secure computer network that utilizes passwords, encoded firewall programs, and virus detectors. Businesses must install reputable and up- to-date antivirus software on their computer systems. Employees need to watch out for phishing s and scams.

Handling Business Risks There are four ways that businesses handle risks: Risk prevention and control Risk transfer Risk retention Risk avoidance An effective risk prevention program for a business should use a combination of all these methods.

Risk Prevention and Control Screening and Training Employees Providing Safe Conditions and Safety Instructions Controlling Employee Theft Preventing Shoplifting Reducing Workplace Threats

Risk Transfer Purchasing Insurance An insurance policy is a contract between a business and an insurance company to cover a specific business risk. Property Insurance One of the most common forms of business insurance is property insurance. Property insurance covers the loss of or damage of buildings, equipment, machinery, merchandise, furniture, and fixtures. Replacement Cost Coverage—reimburses the business owner for the replacement cost of buildings and other personal property. Automatic Increase Protection—this policy features adjusts the coverage to compensate for inflation on both the building and its contents. Business Interruption—compensates a business for loss of income during the time after a catastrophe when repairs are being made to a building. Liability Insurance Protects a business against damages for which it may be held legally liable, such as an injury to a customer or damage to property of others. Promoting Product and Service Warranties Warranties are promises made by a manufacturer or distributor with respect to the duration of performance and quality of a product. Transferring Risks Through Business Ownership The type of business ownership determines the amount of risk that is managed. In a sole proprietorship, the individual owner assumes all risks. Partnerships enable the partners to share in the business risks. Corporations allow the stockholders, as owners, to share the business risk.

Risk Retention In some cases it is impossible for businesses to prevent or transfer certain types of risks. Therefore, they retain or assume financial responsibility for the consequences of loss. A business has to assume the loss-or retain the risk-if customer trends change and merchandise remains unsold. Most retailers assume the loss of a certain percentage of goods due to damage or theft.

Risk Avoidance Certain risks can be avoided by anticipating the risk and rewards in advance. Risk avoidance means that a business refuses to engage in a particular activity, such as producing or selling a certain product or offering a particular service. Avoidance may seem like a good strategy to avoid all risks. However, avoiding risks also means missing out on the potential gain that accepting or retaining the risk may have offered.