Understanding Business Risks: Types and Management
Risk Management
Decisions create risk.
Risk: The possibility of loss or injury.
Some risks may be easier to tolerate than others.
Business risks are risks that businesses face, such as the potential for financial loss.
You can’t eliminate risk, but you can reduce and manage it.
Risk Management Definition
Risk management: A systematic process of managing risk to achieve your objectives.
Types of Risk
Risk may be insurable or uninsurable, as well as controllable and uncontrollable. It can be further identified as pure, economic, human, or natural risk.
Insurable Risk
Insurable risk: A risk that meets an insurance company’s criteria for insurance coverage.
Insurance: Paid protection against loss due to injury or property damage.
Uninsurable Risk
Uninsurable risk: A risk that is unacceptable to insurance carriers because the likelihood of loss is too high.
Controllable Risk
Controllable risk: When conditions can be controlled to minimize the chance of harm.
Uncontrollable Risk
Uncontrollable risk: Can’t be controlled.
Pure Risk
Pure risk: The threat of a loss with no opportunity for gain.
Businesses run the risk of loss from employee theft, burglary, bad checks, and accidents involving customers and employees.
Businesses don’t receive insurance funds for avoiding financial losses due to these occurrences.
The purpose of insurance is to hedge against the risk of potential financial loss.
Economic Risk
Economic risk: When there is a likelihood of economic loss.
You can protect yourself against economic loss.
For businesses, economic risk results from changes in overall business conditions.
Categories of Economic Risk:
- Personal risk: Associated with illness, disability, loss of income, unemployment, aging, and premature death.
- Property risk: Risk of damage to or loss of property due to theft, wind, fire, flood, etc.
- Liability risk: Potential for losses to others that occur as a result of injury or damage that you may have caused.
Human Risk
Human risk: The risk of harm caused by human mistakes, dishonesty, or another risk that is attributed to people. Stolen checks or credit cards.
People who are dishonest or careless may cause risk.
Customer Dishonesty
Customer theft, fraudulent payment, or nonpayment may cause human risk.
Employee Risk
Companies depend on their employees to do their job well; mistakes can negatively impact the business.
Computer-Related Crime
Has emerged as a significant new human risk.
Malicious programs, called computer worms or viruses, can be inadvertently downloaded by employees and can weaken the computer system.
Hackers may break into computer systems to gain access or information for mischievous or criminal purposes.
Crime Prevention
Taking precautions at home and in public may avoid risks associated with crime.
To protect against theft, many businesses install closed-circuit cameras, proper lighting, and alarm systems. Also, thoroughly review job applicants.
Natural Risk
Natural risk: The possibility of a catastrophe caused by a flood, tornado, hurricane, fire, lightning, drought, or earthquake.
These natural occurrences can cause damage or loss of property.
Some risks are caused by people: power outages, oil spills, terrorism, and war.