Risks in BusinessRisks in Business

Chapter 19Chapter 19

What is riskWhat is risk

Risk is the possibility of loss or Risk is the possibility of loss or failurefailure

– Three main types in businessThree main types in business

EconomicEconomic

NaturalNatural

HumanHuman

Economic RisksEconomic Risks

Changes in the market that force a Changes in the market that force a lowering of prices, change of lowering of prices, change of products, or failure of businessproducts, or failure of business– CompetitionCompetition– Shifts in consumer demandsShifts in consumer demands– ObsolescenceObsolescence– Government interventionGovernment intervention– Business conditionsBusiness conditions

Economic risksEconomic risks

Are the most difficult to Are the most difficult to predict and preventpredict and prevent

Natural RisksNatural RisksThose risks that result from Those risks that result from natural causesnatural causes–TornadoesTornadoes–FloodsFloods–EarthquakesEarthquakes–LightningLightning–FiresFires

Human RisksHuman Risks

Risks caused by human Risks caused by human weakness and/or predictabilityweakness and/or predictability– DishonestyDishonesty– CarelessnessCarelessness– IncompetenceIncompetence– Accidents/illnessAccidents/illness

Pure RisksPure RisksMean that there is a possibility of Mean that there is a possibility of loss or no loss but not for gain.loss or no loss but not for gain.– Possibility that one of your Possibility that one of your

workers may wreck the workers may wreck the company truckcompany truck

– Insurance companies furnish Insurance companies furnish insurance coverage for these insurance coverage for these risks.risks.

Speculative RisksSpeculative RisksThe risk may result in a The risk may result in a lossloss, , no no changechange, or , or a gaina gain

You may risk some of your business’s You may risk some of your business’s profits on a new product idea. You profits on a new product idea. You may experience a loss, gain, or no may experience a loss, gain, or no changechange

No insurance usually No insurance usually provide noprovide no insurance for this type of riskinsurance for this type of risk

Four Ways Businesses Handle Four Ways Businesses Handle RisksRisks

Preventing or ControllingPreventing or Controlling

Risk TransferRisk Transfer

Risk RetainedRisk Retained

Risk AvoidanceRisk Avoidance

Risk Management Risk Management

Reducing the risks associated Reducing the risks associated with marketing decisionswith marketing decisions– Some examples are?????Some examples are?????

Risk Prevention and ControlRisk Prevention and Control

Safety:Safety:– Enough aisle spaceEnough aisle space– Safety training (OSHA)Safety training (OSHA)– Safety lidsSafety lids– Label warningsLabel warnings– Fire extinguishersFire extinguishers– Slippery when wet signsSlippery when wet signs

BurglaryBurglary

Security systemsSecurity systems

Dead bolt locksDead bolt locks

CamerasCameras

Security barsSecurity bars

Security guardsSecurity guards

ShopliftersShoplifters

CamerasCameras

Ink tagsInk tags

Security peopleSecurity people

Undercover employeesUndercover employees

Train employees to watchTrain employees to watch

Employee IncompetenceEmployee Incompetence

Screen applicants well at Screen applicants well at initial interviewsinitial interviews

Effective trainingEffective training

On-going evaluationsOn-going evaluations

Product SelectionProduct Selection

Choose goods/services Choose goods/services needed/wanted by needed/wanted by customerscustomers

Market researchMarket research

CreditCredit

This is where businesses extend This is where businesses extend credit (extended payment termscredit (extended payment terms– Screen all applicants carefullyScreen all applicants carefully– Require proper identificationRequire proper identification– Credit checksCredit checks

Changes in local areaChanges in local area

Population trends – area Population trends – area growing or decreasing in size growing or decreasing in size (know the trends)(know the trends)

Competition - Know when Competition - Know when new competition comes into new competition comes into town and what they are town and what they are offeringoffering

Weather ExtremesWeather Extremes

Lightning rodsLightning rods

Storm sheltersStorm shelters

Snow plows, ice meltSnow plows, ice melt

Risk TransferRisk TransferContractual AgreementsContractual Agreements–Guarantees/WarrantiesGuarantees/Warranties–Surety bond – failure of Surety bond – failure of person to do duty person to do duty (housekeepers and theft)(housekeepers and theft)

–Rental or lease agreementRental or lease agreement

Risk TransferRisk TransferBusiness Organization Business Organization – Sole proprietorship: owner has all of Sole proprietorship: owner has all of

the riskthe risk

– Partnership: the risk is shared among Partnership: the risk is shared among partnerspartners

– Corporation: Risk limited to Corporation: Risk limited to investment in businessinvestment in business

Transfer risksTransfer risks

InsuranceInsurance–PropertyProperty–VehicleVehicle–Personal InjuryPersonal Injury–Product liabilityProduct liability

Why are some risks retained?Why are some risks retained?

Management unaware of riskManagement unaware of risk

Management underestimates Management underestimates riskrisk

Risk is small in monetary Risk is small in monetary termsterms

Chance of return or profitChance of return or profit

Risk AvoidanceRisk Avoidance

Don’t invest in risky Don’t invest in risky venturesventures

Don’t offer products or Don’t offer products or services that are not a services that are not a sure thingsure thing

Inventory shrinkageInventory shrinkage

Difference between what the Difference between what the company’s inventory records show company’s inventory records show and what is actually in stockand what is actually in stock

Ways employees cause inventory Ways employees cause inventory shrinkageshrinkage

Making personal use of company Making personal use of company propertyproperty

Making recordkeeping errorsMaking recordkeeping errors

Making selling mistakesMaking selling mistakes

Damaging goods and not Damaging goods and not reportingreporting

Making receiving mistakesMaking receiving mistakes

Stealing goods from the companyStealing goods from the company

Customers cause inventory Customers cause inventory shrinkageshrinkage

By shopliftingBy shoplifting

By breaking itemsBy breaking items

Vendors cause inventory shrinkageVendors cause inventory shrinkage

Delivering a short shipmentDelivering a short shipment

Preparing inaccurate invoicesPreparing inaccurate invoices

StealingStealing

Failing to give credit for Failing to give credit for returned goodsreturned goods

Marketing Mix RisksMarketing Mix Risks

Product –Product –– damage before sold or used damage before sold or used (good packaging(good packaging

– poorly designed products, poorly designed products, –deterioration (food is dated)deterioration (food is dated)–Product liability for loss or Product liability for loss or damagedamage

DistributionDistribution

Safety of vehiclesSafety of vehicles

Safety of employees – Safety of employees – proper liftingproper lifting

Safety of goods – Safety of goods – protection against theftprotection against theft

PricePrice

Price for product Price for product must be a valuemust be a value

Not price too Not price too high (lose sales)high (lose sales)

Not price too low Not price too low (lose profit)(lose profit)

PromotionPromotion

Effectively reach target Effectively reach target marketmarket

Information must be honest Information must be honest and accurateand accurate

Other business’s misleading Other business’s misleading people about your people about your products/servicesproducts/services