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Risk Management and Types of Risks

Lesson Objectives
Define Risk and Risk Management List and Describe 3 Types of Risks Know and Understand 4 Basic Ways to Handle and Control these Risks List 3 types of Ways to Transfer Risks Know the Difference Between Risk Avoidance and Risk Acceptance

What is Risk Management?

Risk - The possibility of financial loss Management - The business function used to plan, organize, and control all available resources to reach company goals Risk Management - The systematic process of managing an organizations risk exposure to achieve objectives in a manner consistent with public interest, human safety, environmental factors, and the law.

Kinds of Risks
3 Types Economic Natural Human

Economic Risks
These risks occur from changes in overall business conditions. This can include:
amount or type of competitor(s) changing consumer lifestyle population changes government regulations inflation recession

Natural Risks
Natural risks are result from natural disasters or disruptions
floods tornadoes hurricanes fires droughts lightning earthquakes even sudden abnormal weather conditions

Human Risks
These are caused by human mistakes and errors, as well as the unpredictability of customers, employees, or the work environment This could include:
Theft injury on the job bad checks employee error Negligence Incompetence etc.

Ways to Handle Business Risks

There are 4 principle ways to handle risks
Risk Prevention and Control (Loss Prevention) Risk Transfer Risk Acceptance Risk Avoidance

Risk Prevention and Control

Screening and Training Employees Providing Safe Conditions Providing Safety Instruction Preventing External Theft Deterring Employee Theft
This is often called Loss Prevention in the business world

Risk Transfer
3 Common Risk Transfers insurance product/service warranties transference through business ownership

Insurance policy - contract that covers a business with a specific type of insurance reducing risks Business liability - insurance protects a business against damages for which it may be held legally liable, usually up to only $1 million. Personal liability - covers damages by customer and/or employees Product liability - protects from personal injury caused by product manufactured or sold by the business

Product/Service Warranties

Warranties are simply promises made by the seller or manufacturer with respect to the performance and quality of a product and protection against loss

Transference Through Ownership

The total amount of risk the business must handle depends in part on the type of business ownership
For example, a entrepreneur who owns a sole-proprietorship assumes all the risk as where a stockholder in a corporation assumes only his percentage of the risk.

Risk Acceptance
When the business assumes the loss responsibility into the upkeep of the company Most companies pull out a certain percentage of their revenue for damages, loss to theft, and unsold items.

Risk Avoidance

Risks can be avoided by advance anticipation Following market research can assist a business in making the decision on whether or not to invest in a product. To determine whether the product is a low risk you must weigh the potential benefits against the potential risks

Risk Management Plan

Develop an overall Risk Management Plan for the business Develop a specific Risk Management Plan for specific events that occur within the business Revisit the plan regularly to update

What We Have Learned

The three types of risks: economic, natural, human

The terms important to Risk Management:

risk - the possibility of financial loss risk management - the process of how a business controls the risk of financial loss while staying consistent with the publics interest, safety, environmental factors, and the law

There are more ways than one to handle risks effectively.

Loss prevention risk transfer - insurance, warranties, and transferring ownership risk acceptance - assume responsibility of loss risk avoidance - anticipating product failure and not investing in product/service