8.01 Summarize the concept of risk management

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8.01 Summarize the concept of risk management
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Risk

• Possibility of a financial loss or failure
• Individuals or companies willing to take risk
  because of opportunity for success or financial
  gain

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3 Most common risks for a business

• Economic
• Natural
• Human

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1. Economic risk

• Risk associated with the possibility of loss due
  to a change in the economy
• A business might experience monetary loss due to
  changes in overall business conditions

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Economic risk involves

• Competition
• Changing consumer lifestyles
• Inflation
• Population changes

• Limited usefulness or popularity of some products
  
• Obsolescence
• Government regulation
• Recession

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Examples of economic risk

• Carolina Hurricanes, Carolina Cobras, and NC
  State basketball team all played at RBC Center in
  Raleigh
• Carolina Cobras moved to Charlotte to increase
  opportunity to make profit

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2. Natural risk

• Risk associated with possibility of loss due to
  natural causes

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Natural risk involves

• Drought
• Earthquakes
• Hurricanes
• Tornadoes
• Lightning

• Fires
• Other unexpected changes in normal weather
  conditions

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Example of natural risk

• Lubbock Texas, 2002, Brittany Spears concert was
  cancelled due to power outage from a storm

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3. Human risk

• Risk associated with the possibility of loss due
  to human factors.

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Human risk

• Risks affiliated with employees or endorsers
  might include dishonesty, incompetence,
  accidents, illness or negligence

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Examples of human risk

• Customer unpredictability
• Employee unpredictability
• Human mistakes including dishonesty, fraud,
  accidents

• Lowes Motor Speedway removed first 2 rows of
  seats on front stretch to protect fans from
  flying debris

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Risk management

• The management, control, and prevention of
  exposure to internal or external risks

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Risk management plan

• Outlines procedures for handling all forms of
  business risk

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Risk management plan

• Important considerations to be included in a
  plan
• Identify the potential business risks
• Measure the prioritize business risks
• Determine how to effectively handle each risk
• Implement risk management plan

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Risk prevention

• Involves dealing with risks before they occur

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Risk prevention involves

• Screening potential employees
• Interviews and aptitude tests are the two most
  common ways businesses screen employees

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Risk prevention involves

• Training and orienting new employees to company
  polices and procedures

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Risk prevention involves

• Providing safe conditions and safety instructions
  for employees
• Proper safety instruction can reduce the
  possibility of on-the-job accidents

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Risk prevention involves

• Preventing external theft
• Shoplifting is stealing merchandise for a
  business
• Robbery is stealing merchandise or money through
  the use of force or threat

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Risk prevention involves

• Preventing internal theft
• Dishonest employees could steal merchandise
  (larceny) or money (embezzlement) from a company

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Risk transfer

• Involves passing risk

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Risk transfer accomplished by

• Purchasing insurance against a potential loss.
• Examples include property, liability, business
  interruption, and income insurance.

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Risk transfer accomplished by

• Using warranties to transfer risk to manufacturer
• A warranty is a written guarantee that a product
  or service will meet certain quality standards

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Risk transfer accomplished by

• Warranties (cont)
• If product or service does not meet the
  expectations of consumer, or if product fails,
  manufacturer is held responsible
• Most warranties have specific time or use limits

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Risk transfer accomplished by

• Business ownership
• Type of business determines how much risk is
  incurred by each owner
• In a sole proprietorship or partnership, all
  risks assumed by individual owners

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Risk transfer accomplished by

• Business ownership (cont)
• In contrast, a corporation distributes risk among
  all of its shareholders.

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Risk retention

• Involves assuming or acknowledging a business
  risk and outcome
• Some risks are inevitable or uncontrollable
• Some risks cannot be transferred, avoided,
  insured or prevented

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Risk avoidance

• May be achieved by anticipating business risk and
  preparing for risk in advance
• Avoid opportunities or investments that have
  potentially high risk
• Pursue an option or strategy that involves less
  risk