Risk Management What is risk Risk is the

Risk Management

What is risk? ? Risk is the possibility of loss or failure, with hopes of gain –Three main types in business Economic Natural Human

Economic Risks Changes in the market that force a lowering of prices, change of products, or failure of business –Competition –Shifts in consumer demands –Obsolescence –Government intervention –Business conditions – inflation/recession

Economic risks Are the most difficult to predict and prevent

Natural Risks Those risks that result from natural causes –Tornadoes –Floods –Earthquakes –Lightning –Fires

Human Risks caused by human mistakes and/or predictability –Dishonesty –Carelessness –Incompetence –Accidents/illness –Theft

List examples of the following types of risks for Somerset High School Human Natural Economic

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

Four Ways Businesses Handle Risks Preventing or Controlling Risk Transfer Risk Retained Risk Avoidance

Shoplifters Cameras Ink tags Security people Undercover employees Two Way mirrors Train employees to watch

Pilferage – theft of small items Have policies in place regarding making copies, use of supplies, etc. Do background checks on employees Cameras

Robbery – theft that involves force/violence Limit the amount of money kept in the business Install video cameras Hire extra employees (no one by themselves) Hire security guards Install switches at cash registers Take money to bank at different times

Burglary –illegal entry into a building to commit theft Security systems Dead bolt locks Cameras Security bars Security guards Don’t keep cash in Building Increase lighting

Fraud – deceiving a business out of property or money Price ticket switching – have employees know prices of merchandise Hard to remove labels on merchandise Bar code scans

Fraud (continued) Point-of-sale fraud – – Have employees aware of prices – Have received money on cash register ledge – Have pens to check for counterfeit bills – Have check scanners – Have two numbers on checks, check driver’s license – Check ID for credit/debit cards.

Recordkeeping Fraud Hire honest employees – do background checks Train employees on steps to follow for paperwork Divide up cash-related responsibilities On unannounced occasions, audit the books and records

Computer Fraud Do not let unauthorized people to have access to the computers Lock your computer when you leave your desk Do not give out codes or passwords Only allow certain employees to have access to confidential files

Insurance to Transfer Risks Property – insures a business against property risks such as fire, robbery, and storm damage. – Property insurance does not protect against floods or earthquakes (have to buy separate insurance for this)

Casualty insurance Protects a business against lawsuits. • Person falls in the parking lot • A product you manufactured or sold caused bodily injury to a customer

Life Insurance/Worker’s Compensation Life insurance – pays money in the event the owner of the business dies. Worker’s Compensation – payments to employees who are injured on the job – Provides medical coverage – Pay for missed days off work

Other Types of insurance Flood Business interruption Crime Renter’s insurance

Can also transfer risks by: Warranties – a written guarantee, issued to the purchaser of an article by its manufacturer, promising to repair or replace it if necessary within a specified period of time. Guarantee - provide a formal assurance or promise, especially that certain conditions shall be fulfilled relating to a product, service, or transaction.

Personal Risk Transfer Insurance Disability Insurance – provides a monthly payment that replaces some of your lost income because of illness or injury Critical illness insurance – pays a lump sum amount on the first diagnosis of a serious life-threatening condition. – Cancer, stroke, heart attack

Types of Personal Insurance Life insurance – pays a tax-free, lump -sum amount to your named beneficiaries upon your untimely death Health – covers a percentage of your health care costs not covered by your company health insurance. Long-term care insurance – provides cash payments if you require care in your home or nursing care facility.

Why are some risks retained? Management unaware of risk Management underestimates risk Risk is small in monetary terms Chance of return or profit

Risk Avoidance Don’t invest in risky ventures Don’t offer products or services that are not a sure thing

Handling Accidents Have someone get the manager Do an accident report Call 911 if necessary Follow company policy Do not treat a person if unsure of what doing

Dealing with workplace threats Stay calm Be cautious Never put yourself in danger Follow company procedure

Safety Precautions Have “wet” floor signs Keep items out of walkways and aisles Don’t lift heavy items without properly bending your knees Ladders – follow directions on height and weight restrictions

Risk Prevention and Control Safety: – Enough aisle space – Safety training (OSHA) – Safety lids – Label warnings – Fire extinguishers – Slippery when wet signs

Employee Incompetence Screen applicants well at initial interviews Effective training On-going evaluations

Product Selection Choose goods/services needed/wanted by customers Market research

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

Changes in local area Population trends – area growing or decreasing in size (know the trends) Competition - Know when new competition comes into town and what they are offering

Weather Extremes Lightning rods Storm shelters Snow plows, ice melt

Risk Transfer Contractual Agreements –Guarantees/Warranties –Surety bond – failure of person to do duty (housekeepers and theft) –Rental or lease agreement

Risk Transfer Business Organization –Sole proprietorship: owner has all of the risk –Partnership: the risk is shared among partners –Corporation: Risk limited to investment in business

Transfer risks Insurance –Property –Vehicle –Personal Injury –Product liability

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

Ways employees cause inventory shrinkage Making personal use of company property Making recordkeeping errors Making selling mistakes Damaging goods and not reporting Making receiving mistakes Stealing goods from the company

Customers cause inventory shrinkage By shoplifting By breaking items

Vendors cause inventory shrinkage Delivering a short shipment Preparing inaccurate invoices Stealing Failing to give credit for returned goods

Marketing Mix Risks Product – – damage before sold or used (good packaging – poorly designed products, –deterioration (food is dated) –Product liability for loss or damage

Distribution Safety of vehicles Safety of employees – proper lifting Safety of goods – protection against theft

Price for product must be a value Not price too high (lose sales) Not price too low (lose profit)

Promotion Effectively reach target market Information must be honest and accurate Other business’s misleading people about your products/services