Unit 4 - Managing Your Business
Learning Target 4: I can explain how businesses manage risks
Every business has to deal with risks. Risks are very common in business and they must be constantly continue to monitor and evaluate all risks. Risks are the possibility of loss or gain in relation to conducting business. There are many different types of risk that fit into two major categories;
Pure risks are risks with two possibilities—loss or no loss. The loss a business owner faces from a hurricane. His business may be damaged, or it may not, but there's no chance he will gain something from a hurricane. Pure risks are considered insurable risks, meaning that businesses are able to take out insurance policies against them. If a tornado occurs, it may hit the building and cause damage (loss) or pass the building and not cause damage (no loss) that would be an example of a pure risk.
Speculative risks the possibility of loss, no change, or gain. This category includes strategic and financial risks. Since these risks are unpredictable, they're uninsurable. When opening and running a business, the owner may turn a profit (gain), breakeven (no change) or go bankrupt (loss) is an example of a speculative risk.
Digging deeper into the specific categories of risk, there are safety risks, operational risks, strategic risks, financial risks
Safety risks are preventable or controllable types of risks that involve the physical well-being of employees, customers, and visitors. For example, having the fire extinguishers checked and charged every year is a way to reduce a potential safety risk. Other types of safety risks involve natural disasters, property damage such as floods and fire, employee working conditions, customer shopping conditions such as not shoveling the snow from the sidewalk immediately after it snows, and crime.
Operational risks are risks that are possible from day to day business operations. These can range from human risks which could be an employee not doing their job effectively of correctly to product risks where a business might not be able get all the parts it needs or if a machine breaks down. Operational risks also involve leadership problems such as leaders not making the correct decisions which could be a result of inaccurate or insufficient information. Finally, labor relations is an operational risk which could impact the business if the employees decide to go on strike or stage a sit in.
Strategic risks are wider in scope than the other risks but can have a huge impact on the success of a business. This can range from business reputation damage from negative publicity, new competition entering the market, your product becoming obsolete, regulatory and political regulations that impact how you manufacture your product, changing customer needs in which your product does not meet the needs and wants of the customer anymore.
Financial risks are possible situations that impact the cash flow of a business. These can be broken down into external financial risks and external financial risks. External financial risks are items such as inflation, interest rate changes, changes in the value of the US dollar. Internal risks are ones that the business can control such as being too optimistic on future sales, to inadequate financial reporting to unethical accounting practices.
Risk Management is the process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making. When a business sees a risk they have a few options called risk control methods. Risk control methods are used to reduce or minimize loss.
Three common risk-control techniques include loss prevention, loss avoidance, and loss reduction.
1. Loss Prevention focuses on stopping certain losses from occurring.
Our business conducts a quarterly store inventory, checks employee bags before leaving, has installed security scanners at the entrances and has put in place other loss prevention measures
2. Loss Avoidance when they choose not to take part in risky activity.
One may decide not to purchase a house in order to guarantee that one never has to pay to repair the roof is an example of loss avoidance
3. Loss Reduction lessens the impact of a loss after it occurs.
For instance, although the automatic sprinklers won't prevent a fire from starting, they will lessen the impact that the fire has on the company's buildings