What is Business Risk?
Business Risk: The possibility of losses associated with the assets and earnings potential of a firm.
Market Risk: The uncertainty associated with an investment decision.
Pure Risk: The uncertainty associated with a situation where only loss or no loss can occur (not a chance for gain).
Key Insights
"There is risk in everything that one does, and no one knows where he will make his land-fall when his enterprise is at its beginning..." - Solon, 6th century Greek Poet
"In this world, nothing can be said to be certain, except death and taxes." - Benjamin Franklin
1. Property Risks
- Real Property: Land and anything attached to it (e.g., buildings).
- Personal Property: Machinery, equipment, inventory, vehicles.
- Perils: Causes of loss (natural events, human actions).
- Direct Loss: Physical damage reducing property value.
- Indirect Loss: Loss from inability to operate due to direct loss.
2. Liability Risks
- Statutory Liability: From laws, like worker’s compensation.
- Contractual Liability: Assumed via contracts (e.g., indemnification clause).
- Tort Liability: From wrongful acts causing injury or damage.
3. Personnel Risks
- Premature Death: Financial impact on family or the business.
- Poor Health: Can lead to medical expenses and inability to work.
- Insufficient Retirement Income: The risk of outliving one's savings.
The 5 Steps
1
Identify and understand risks.
2
Evaluate risks.
3
Select methods to manage risk.
4
Implement the decision.
5
Review and evaluate.
Management Strategies
Risk Control
Minimizing potential losses by preventing, avoiding, or reducing risk.
- Loss Prevention: Keeping a loss from happening.
- Loss Avoidance: Choosing not to engage in hazardous activities.
- Loss Reduction: Lessening the frequency or severity of losses.
Risk Financing
Making funds available to cover losses that cannot be eliminated.
- Risk Transfer: Buying insurance or using contracts to transfer risk.
- Risk Retention: Financing loss intentionally through cash flows (self-insurance).
Property and Casualty Insurance
- Property Insurance: For buildings and business personal property.
- Commercial General Liability: Covers premise, operations, and product liability.
- Automobile Insurance: For business vehicles.
- Workers’ Compensation: For employees injured at work.
- Crime Insurance: Covers employee dishonesty.
- Cyber Liability: For data breaches and online risks.
- Umbrella Liability: Extra coverage for major lawsuits.
Life and Health Insurance
- Health Insurance: Medical coverage for employees (HMO, PPO).
- Key-Person Life Insurance: Provides benefits to the firm if a key employee dies.
- Disability Insurance: Provides income if a key employee is disabled.
- Disability Buyout Insurance: Provides cash for a healthy partner to buy out a disabled partner.