AB209 Small Business Management Unit 9 – Managing Business Risk

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Managing Business Risk An additional planning consideration should be a part of any business planning: risk management! Risk management involves realistic understandings of the business world and requires proactive strategies to effectively manage the threats of risks to the business. It is an important part of small business management! 3

Unit 9 Outcomes Define business risk and explain its two dimensions.   Define business risk and explain its two dimensions. Describe the steps in the risk management process and explain how these can be used in a small business. Explain the role of insurance in risk management. 4

Unit 9 To Do List Start the Unit: Review the key terms Study: Read Chapter 23 in your text.  Prepare: Carefully review the previously completed sections of your descriptive business plan in your AB209 Project Template. Preview your Unit 10 Writing Assignment Graded Assignments: Respond to the Unit 9 Discussion Board Complete and submit the Unit 9 Final Project Complete the Unit 9 Review Attend the Unit 9 Class Seminar or complete the Alternative Assignment   5

Unit 9 Class Discussion Unit 9 Discussion: Using your own business plan venture, after reading Chapter 23:   1. Discuss seven of the most significant risks your proposed venture faces in detail. 2. Discuss possible ways each of these risks can be managed. 6

Unit 9 Assignment: Final Project! Using the AB209 Project Template and AB209 Project Instructions, complete the following:   Incorporate any instructor feedback received into all previously submitted sections of the Descriptive Business Plan. Complete the Executive Summary section in the Descriptive Business Plan.    7

Business Risks What is business risk? It is any possibility of losses to the assets and earnings potential of the business. Two Types of Business Risk: Market Risk – The possibility of loss associated with an investment decision. Pure Risk – An uncertain situation containing either loss or no loss to the business. Let’s Discuss each one briefly

Market Risk Market risk is inherent in the launce of a new business. It cannot be avoided. It can instead be reduced through the entrepreneur’s knowledge of the opportunity, careful evaluation of the opportunity, and the possession of the necessary managerial skills required to launch and operate the new business. Market risk is assumed by the entrepreneur and any investors in the venture.

Pure Risk Pure risk can be classified as: Property Risks – Either real property or personal property. Losses can be due to perils such as storms, floods, earthquakes, lightening, etc. The losses can be either: Direct – In which direct damage to the property reduces its value to the business. Indirect – In which the direct loss results in the business’ inability to carry out its normal operations resulting in increased costs or reduced revenues.

Pure Risk (Continued) Liability Risks – Occur when a business’ operations violates some protected rights of others. There are three types of such liability: Statutory Liability – Arises when a business violates a law. Contractual Liability – Arises from provisions written into contracts binding the business. Tort Liability – Arises from wrongful actions of the business or its agents that harm or injure others.

Pure Risk (Continued) Personnel Risks – Are risks that impact individual employees but also indirectly increase the business’ risk. Question: Should business risks be avoided or managed?

Examples of Pure Risk Property Risks: Personal – equipment, machinery, fixtures, vehicles, etc. Real – buildings, land Liability Risks: Statutory Risks: Workers compensation, anti-discrimination, etc. Contractual Liability: Leases, written agreements, etc. Tort Liability: Defective products, unsafe premises, accidents, etc.

Examples of Pure Risk (Continued) Personnel Risks: Premature Death Poor Health Insufficient Retirement Income

Risk Management as a Process: Step 1 - Identify and understand the risks Step 2 – Evaluate the risks Step 3 – Select methods to manage risk Step 4 – Implement the risk management decision Step 5 – Review and evaluate the selected risk management approach

Risk Management and Insurance: Step 1 – Identify business risks that are insurable. Step 2 – Purchase insurance for all major potential losses. Step 3 – Weigh the costs versus benefits of insuring smaller potential losses.

Types of Business Insurance: Property: Insures the buildings and facilities, equipment, fixtures, etc. Commercial General Liability: General liability coverage for business operations. Automobile: Insures against accidents involving business vehicles. Workers’ Compensation Insurance: Provides insurance to comply with state workers’ compensation statutes. Crime: Insures against losses involving theft, embezzlement, etc.

Types of Business Insurance: (Continued) Life and Health: Various insurance plans to insure against losses due to medical and hospitalization costs. Key-Person Life: Protects the business against financial losses in the event of the death of key personnel. Disability: Insures against losses due to costs associated with the disability of a partner or key employee.

Any questions?

This Concludes Our Weekly Seminars For This Term! I want to thank you for your dedication to our seminars this term! It has been a pleasure meeting with you each week!

Thank you for joining me today Thank you for joining me today! Don’t forget our Unit 10 Class Activities!