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Small Business

Protection
Risk Management and
Insurance

Chapter 17

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives

LO1 Explain the meaning and nature of


business risk.
LO2 Describe the specific types of risks
associated with different aspects of
business operations.
LO3 Describe techniques to manage risks to
stay within your level of risk tolerance.

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Learning Objectives

LO4 Explain how insurance can be used to


manage business risk.
LO5 Describe techniques for sharing risk
with other businesses and
organizations.

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Risk in Small Business

 Business risk
– The level of probability that the future
economic state of the business will be
worse than expected.

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Most Commonly Identified
Sources of Risk
 Financial risk  Injury from
 Nonpayment of accidents incurred
debts by customers
 Changes in  Natural events
technology (storms, floods, fire,
earthquakes)
 Injury and illnesses
 Theft of business
suffered by
property
employees
 Misbehavior by
employees
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Risks Associated with Specific
Business Operations
1. Events related to the property of the
business
2. Events related to personnel
3. Events related to customers and
others

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Property of the Business

 Property involves specific forms of


risk
– Inventory can be stolen, machinery can
break
– Buildings can be damaged or destroyed
– Land may become contaminated
– Patents may be infringed upon

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Events Related to Personnel

 Employee theft  Regulation of


– Misappropriation the workplace
of business – Laws and
property by governmental
employees of that rules that limit the
business. freedom of
business owners
to manage their
businesses as
they please.

17-8
Loss of Key Employees

 Key employees
– Employees whose experience and skills
are critical to the success of a business
 Loss of key employees is a
particularly acute risk for small
businesses

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Events Related to Customers
and Others
1. Injuries suffered while upon business
property
2. Injury or damage that is caused
during the use of the business’s
products.

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Events Related to Customers
and Others
 Product liability
– Payment for injury or damage that
occurs during the use of the business’s
products

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Events Related to Customers
and Others
 Risk of nonpayment by customers is
experienced by all businesses that
offer credit
 Must balance:
– giving credit to customers will increase
your sales
– offering credit guarantees sooner or later
some customer will not pay as promised.

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Managing Risks

Best strategy is to develop a business


environment that minimizes:
 Probability of the event occurring
 Amount of loss that can be experienced if
the event does occur

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Managing Risks

 You create this strategy by:


– Making specific plans for, and
arrangements to deal with, foreseeable
events
– Creating and enforcing an appropriate
code of conduct for yourself and all
employees

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Managing Risks (cont.)

 You create this strategy by:


– Ensuring that valuable assets are
physically secure
– Actively working to get rid of any
physical hazards in your workplace

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Managing Risk to Computers
and Data
 Required PC
protection

17-16
How Online Backup
Systems Works

Figure 17.1

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Managing Risk to Intangible
Property
 Intellectual property rights comprise
the legal rights to use unique features of
products or services that provide
competitive advantage.
 If the holder of the intellectual property
rights promptly reacts to infringement by
making written objections to any and all
infractions, can the legal rights be
maintained.

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Protecting Yourself from Theft

 Separation of duties
– A type of internal control that separates
the physical control of an asset from the
person accounting for that asset.

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Sources of Theft

Figure 17.2

17-20
Percentage of Frauds
by Method of Detection

Figure 17.3
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Managing Risk Resulting from
Events Involving Personnel
 Internal control
– A set of rules and procedures that work
to limit the opportunity for employee
theft or malfeasance.

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Managing Risk from Violations of
Tax Regulations
 Tax codes
– Laws and regulations that specify the
requirements of taxation
– include franchise or corporation taxes,
income taxes, employee taxes, sales
and use taxes, and property taxes

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Managing Risk from Violations of
Tax Regulations
1. Keep complete, accurate accounting
records
2. Establish a relationship with both an
accountant and a lawyer who are
expert in tax issues
3. Make paying your taxes your first
financial priority

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Managing Risk from Employee
Violation of Government
Regulations
1. Have a written policy provided to
each employee
2. Conduct training of managers and
employees concerning those
policies,
3. Immediately and consistently act
upon receipt of any complaint.

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Handling ADA Requirements

1. Determine if you are subject to any


of the provisions of the ADA
2. Obtain the services of experts on
the ADA to evaluate the level of
your compliance
3. Work diligently to meet the
requirements to which you are
subject.

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Using an Internal Audit as a Tool
to Manage Risk
A properly conducted, independent
internal audit will give you:
 An evaluation of your overall level of business risk.
 An objective evaluation of your risk control
structure.
 A systematic analysis of your business processes
and controls.
 Information on irregularities detected during the
audit process.

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Using an Internal Audit as a Tool
to Manage Risk
 Review of your firm’s compliance with
relevant regulations.
 A review of the existence and value of the
assets of your business.
 Review of operational and financial
performance.
 Recommendations for more effective and
efficient use of resources.

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Insuring against Risks

 Insurance
– A contract between two or more parties
in which one party agrees, for a fee, to
assume the risk of another.

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Developing a Comprehensive
Insurance Program
 Coverages
– Contractual provisions of insurance
policies that specify what risks the
insurance company is assuming.

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Developing a Comprehensive
Insurance Program
 Identifying risk is the first task
 Determine which risks are to be
covered
– Vehicle liability
– Worker’s compensation
– General liability
– Various types of malpractice coverage

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Insuring the Property of the
Business
 Insurance is determined:
– Property’s insurable value
– Amount of deductible loss
– Amount of co-insurance required
– Loss limits of the policy

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Insuring the Property of the
Business
 Insurable value  Deductible
– The amount of an – An amount of loss
asset for which a that will not be
company will write paid by an
an insurance insurance
policy. company.

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Insuring the Property of the
Business
 Co-insurance
– A contract stipulation that requires a
policyholder to carry insurance in an
amount equal to a stated minimum
percentage of the market value of the
property insured.

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Insuring the Property of the
Business
 Fidelity bonds
– Bonds, also called dishonesty bonds,
that repay employers for losses caused
by dishonest or negligent employees.

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Insuring the Property of the
Business
 Surety bonds
– An agreement with an insurance or
bonding company that will pay a
specified amount in the event that the
entity bonded fails to comply with
specified contractual requirements.

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Insuring the Property of the
Business
 Buyout insurance
– Insurance that provides money to
owners of a business to buy the shares
of any deceased owner from that
owner’s heirs.

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Insuring the Property of the
Business
 Credit insurance
– covers abnormal losses from credit
customers not paying their bills
 Personnel insurance
– available to protect both you and your
employees from specific risks
– Life, Disability, Medical coverage

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Insuring the Property of the
Business
 Key person
– protects you in the event that a key employee
dies or is disabled and cannot work
 Life insurance
– provided to employees to provide security for
their families
 Medical
– most highly desired form of insurance for most
employees

17-39
Sharing Risk

 Joint venture
– An agreement between two or more
entities to pool resources in order to
complete a project

17-40