Lesson 13: Risks and Surprises

1. Lesson 13: Risks and Surprises

2. Objectives • Give examples of the three main types of business risk – economic, human, and natural • Describe the elements of an effective risk prevention plan • Explain the different types of insurance and calculate the cost of premiums • Compute merchandise losses based on book value, inventory value, and sales over time • Weigh each of the following in terms of financial impact: on-demand repair calls, extended product warranties, and service contracts

3. What is a Business Risk? • Circumstances that can threaten financial loss or failure • Risk Management – the process of dealing with risks that minimizes financial loss for a business and maximizes profit potentials

4. Types of Business Risks • Economic Risks • Human Risks • Natural Risks

5. Economic Risks • Caused by changes in the business climate • Downward trend in the national economy • Makes it more difficult to get a loan • Customers cut back on spending • Customers make changes in spending habits • Business owners must make changes in inventory levels and trim expenses

6. Holding onto outdated or obsolete merchandise • Owners must remain knowledgeable about trends and new products • Other economic risks: • Changes in competition • Customer demographics • Customers lifestyle

7. Human Risks • People who are dishonest, careless, or responsible for human error • Can be categorized as security risks or safety risks • Customer Risks – theft by customers (shoplifting, merchandise return fraud, writing bad checks, credit card fraud) • Employee Risks – employee theft (stealing, sweethearting), carelessness and errors (checking merchandise, recording inventory, giving markdowns) • Vendor Risks – errors in shipments • Computer Risks – viruses, hackers

8. Safety risks threaten both customers and employees • Think of airline industry • Patriot Pilot in the US • Safest Airport in the World • Accidents – poor maintenance inside and outside the store • Merchandise displays can collapse • Perishable items can make customers sick • Ie: McDonald’s

9. Natural Risks • Those caused by acts of nature • Earthquakes, fires, floods, hurricanes, landslides, tornadoes • Can cause a business to shut down for a period of time or indefinitely, ruin inventory • Also considered ‘natural’ risks, despite being caused by humans • Power outages, riots, terrorism, arson

10. Handling Risks • Risk prevention • Pre-employment screening • Employee training (on a continual basis about safety issues and loss prevention) • Anti-virus software, secure network, passwords ‘acceptable use’ policies • Providing a safe working environment

11. Risk Transfer • The process of giving the responsibility of dealing with a business risk to another business • Purchase insurance and warranties • Insurance – agreement between an insurance company and business for coverage of a particular risk in exchange for $ • Property insurance – protects a business from losses and damage to buildings, equipment, fixtures, and merchandise • Liability insurance – protects a business from risk exposure due to injuries or property damage • Warranty – guarantee by a manufacturer that a product will provide certain levels of quality and performance

12. Service contract – covers routine, preventive maintenance and specific repairs to equipment • Gives the business owner guarantee that basic functions of equipment will be honored • Weigh the price of the contract with the likelihood of product needing to be fixed

13. Key Math Concepts Costs of Premiums Per Month Annual Premium ÷ 12 = Monthly Premium Merchandise Losses as a % of Sales (Book Value – Phys. Inv. Value) ÷ Sales For a Period