Entrepreneurship

Risk management
Tuan Nguyen, PhD
Risk Management

• Generally, risk is an uncertain event or condition that, if it occurs, has a positive or a negative
effect on a business objective. A risk has a cause and, if it occurs, a consequence. But usually it
has bad/negative connotation
• There are many risks facing an entrepreneur when starting and operating a new business
venture. The trick is to eliminate risks that will hurt the venture, while taking on risks that will
provide for long-term profitability.
• The risks facing the entrepreneur need to be initially identified as part of developing a business
plan and revisited regularly in ongoing operations. Preparation for adverse events affecting a
new business venture is necessary, but being too pessimistic or allowing fear of adverse events
to stop an entrepreneur from taking any risk will keep a business venture from achieving it
greatest potential and profit.
Risk Management

• Risk may be grouped according to the type of asset-Physical or human-needing protection

• Property risks:
• Property-oriented risks involve tangible and highly visible assets. Many property-oriented
risks are insurable; they include:
• Fire , Natural disasters, Burglary, Business swindles (or fraudulent transactions) and,
Shoplifting.
• Personnel risks
• Personnel-oriented losses occur through the actions of employees. The three primary types
of Personnel-oriented risks are:
• Employee dishonesty, Competition from former employees, Loss of key executives
• Customer risks
• Customers are the source of profit for small business, but they are also the source of an ever-
increasing amount of business risk. Much of these risks are: On-premises injuries and
Product liability
• On-premises injuries:
• Customers may initiate legal claims as a result of on-premises injuries.
• e.g. When a customer breaks an arm by slipping on icy steps while entering or leaving a
store;
• Inadequate security, which may result in robbery, assault, or other violent crimes;
Customers who are victims often look to the business to recover their losses.
• Product liability
• A product liability suit may be filed when a customer becomes ill or sustains physical or
property damage from using a product made or sold by a firm.
https://www.foxnews.com/food-drink/woman-wins-100000-from-starbucks-in-hot-coffee-lawsuit
Question: How we are going to manage risks?
Risk Management

• It is important that an entrepreneur develop an understanding of the risks of the business

environment. The risks include liability risks stemming from contracts and torts, sometimes
referred to as operating risks, regulatory compliance risks, financial risks, and strategic risks,
including taxation. Understanding how the business structure is used to operate the business
venture allows the entrepreneur to develop a plan to manage business growth and understand
business risk.
• The complexity of the business environment calls for or demand for a special attention to a risk
• Some of the factors, which increase the complexity of environment, are:
• Inflation
• Growth of internal operation
• More complex technology
• Increasing government regulation
Risk Management

• What is risk management? Many definitions…

• Risk management is a systematic way of protecting business resources and income
against losses so that the organization’s aims are reached without interruption,
creating stability and contributing to profit.
OR
• Risk management is the identification, measurement and treatment of liability,
property and personal pure risks that the business organization is facing in order to
reduce and prevent the unfavourable effects of risk at minimum cost.
OR
• It is the science that deals with the techniques of forecasting future losses so as to
plan, organize, direct and control the adverse effect of risk. i.e., Risk management is
defined on the base of managerial functions.
• Risk management is key to operating any business in a profitable fashion.
Enterprise Risk Management

• In general, the basic functions of the risk management in carrying out of the responsibilities
assigned are:
➢ To recognize exposure to loss
• Is also called as risk identification
• Is the 1st step of risk managers’ function.
• Is the most vital task
• What types of possible losses are there?
• Failure to identify exposure to loss ==> the risk manager will not have any chance
of handling the loss that identify the risk.
• Some techniques for identifying risk are:
• Brainstorming
• Event inventories and loss event data
• Interviews and self-assessment
• Facilitated workshops
• SWOT analysis
• Risk questionnaires and risk surveys
• Scenario analysis
• Using technology
Enterprise Risk Management

➢ To estimate the frequency and size of loss, i.e., to estimate the probability of loss from various
sources. It is also called as risk measurement.
Risk measurement means
• Determination of the chance of an occurrence or relative frequency.
• Determination of the impact of losses upon financial affairs.
• The ability to predict the losses that will actually occur during the budget year.
➢ To decide the best and most economical method of handling the risk if loss. (risk response
development)
• i.e. Selection of the proper tool for handling risk

• Identifies and evaluates possible responses to risk.

• Evaluates options in relation to entity‘s risk appetite, cost vs. benefit of potential risk responses,
and degree to which a response will reduce impact and/or likelihood.
• Selects and executes response based on evaluation of the portfolio of risks and responses
Enterprise Risk Management

➢ Implementing the decision (risk response control)

• Implementation follows all of the planned methods for mitigating the effect of the risks.
Purchase insurance policies for the risks that have been decided to be transferred to an insurer,
avoid all risks that can be avoided without sacrificing the entity's goals, reduce others, and
retain the resource
➢ Revaluating the decision
Initial risk management plans will never be perfect. Practice, experience, and actual loss results will
necessitate changes in the plan and contribute information to allow possible different decisions to
be made in dealing with the risks being faced.
Once the risk manager has identified and measured the risks facing the firm, the next task is to seek
for appropriate tools and decide how best to handle them. Risk can be handled through the
following tools:
Tools of Risk Management

1. Avoidance
One way to handle a particular pure risk is to avoid the property, person or activity with which the
risk is associated.
Two approaches of risk avoidance:
i. Refusing to assume an activity
e.g. For instance, a firm can avoid a flood loss by not building a plant in a place where flood is
frequently affecting. In case of refusing, we are discontinuing the activity
ii. Abandonment of previously assumed activities:
e.g. A firm that produces a highly toxic product may stop manufacturing that product.

2. Retention/Acceptance
I. Planned/conscious/ active risk retention
• It is characterized by the recognition that the risk exists, and tacit agreement to assume the
losses involved.
• The decision to retain a risk actively is made because there are no alternatives more attractive.
• Self-insurance is a special case of active retention. Self-insurance is not insurance, because there
is no transfer of the risk to an outsider.
E.g. A firm may keep some money to retain the risk.
Tools of Risk Management

2. Retention/Acceptance
II. Unplanned/Unconscious/ Passive Retention
• Passive risk retention takes place when the individual exposed to the risk does not recognize its
existence.
• In this case, the person so exposed retains the financial consequence of the possible loss
without realizing that he does so.

3. Loss Prevention and Reduction Measures

• Prevention is defined as a measure taken before the misfortune occurs.
• Generally speaking, loss prevention programs intend to reduce the chance of occurrence.
• Example:
• Constructing a building with a fire resistance material / fireproofing.
• Constructing a building in a place where there is little danger.
• Regularly inspecting the machine / area
• The existence of automatic loss detection programs.
• Fire alarms
• Warning posters /NO SMOKING!! , DANGER ZONE!!/
Tools of Risk Management

3. Loss Prevention and Reduction Measures

• Loss reduction measures try to minimize the severity of the loss once the peril happened/ after the
event occurs.
For Example:
• Automatic sprinkler
• An immediate first aid
• Medical care and rehabilitation service
• Guards
• Cover
• Fire extinguisher
• Fire alarms

4. Separation /Diversification
• Separation of the firm’s exposures to loss instead of concentrating them at one location where they
might all be involved in the same loss.
• Separation==>Dispersion/Scattering the exposure in different places.
• “Don’t put all your eggs in one basket”

• Example: Instead of placing its entire inventory in one warehouse, the firm may elect to separate this
exposure by placing equal parts of the inventory in ten widely separated warehouses.
Tools of Risk Management

5. Transfer
• It is also called as shifting method.
• When a business organization cannot afford to cover the loss by itself, it may look for/transfer
institutions.
• Insurance is a means of shifting or transferring risk.

• The following matrix can determine which risk management be used

Insurance for business

• Insurance is defined as protection against risks. And there are many risks associated with
starting a business. To protect your business and yourself, consider the following insurance
options.
• Insurers are professional risk takers. They know the probability of different types of risk
happening.
1. Basic principles for a sound insurance program
Basic principles in evaluating an insurance program include:
• Identifying insurable business risks
• Limiting coverage to major potential losses and
• Relating premium costs to probability of loss

2. Requirements for obtaining insurance

a) There must be a sufficiently large number of homogenous exposure units to make the losses
reasonably predictable.
• Insurance is based on the operation of the law of large numbers.
• There must be a large number of exposures and those exposures must be homogenous.
• Unless we are able to calculate the probability of loss, we cannot have a financially sound
program.
Insurance for business

b) The loss produced by the risk must be definite and measurable.

• The loss must have financial measurement or financial implication.
• The risk must be calculated
• Example: For instance a person may purchase disability insurance. How do we know that the
person is unable to do? Thus, the risk must be definite and measurable.

c) The loss must be fortuitous or accidental.

• i.e. the loss must be the result of a contingency, i.e., it must be something that may or may not
happen. It must not be something that is certain to happen.
• Wear and tear or depreciation, which is a certainty, should not be insured. No protection is
given by insurance.
• We should not be certain as to the occurrence of a loss

d) The loss must not be catastrophic

• All or most of the objects in the group should not suffer loss at the same time because the
insurance principle is based on a notion of sharing losses.
• Example: Damage which results from war, flood, windstorm and so on would be catastrophic in
nature and hence do not have insurance.
Insurance for business

e) The loss must be large loss

• The risk to be insured against must be capable of producing a large loss, which the insured could
not pay without economic distress.
• Incase the loss occurs, it must be severe that must be transferred to the insurer. Those
recurring and minor types of losses are not transferred to the insurance company.
f) Reasonable cost of transfer
• i.e: the probability of loss must not be too high because the cost of transfer tends to be
excessive.
• To be insurable, the chance of loss must be small. The more probable the loss, the more
certain it is to occur.
• The more certain it is, the greater the premium will be. But to make insurance attractive, the
premium has to be for less than the face of the policy.

https://www.investopedia.com/terms/p/premium.asp
Benefits of Insurance Policy

• Protection: - it provides protection against risk of loss and a sense of security to the
businessmen.
• Diffusion of risks: - as the burden of loss is spread over a large number of people.
• Credit standing: - of the firm is enhanced as the businessman can easily transfer some of his
risks to an insurance company.
• Continuity and certainty of business: - if all the risks were to be borne by the businessmen
themselves, the business operations would have been uncertain and halting in character.
• Better utilization of the capital of the firms: - as the Insurance companies take over the risk, it
enables the business firm to invest and optimally utilize its capital
Information Technology/Cybersecurity for Small Businesses

• The risk of hacking, ransomware, and customer privacy are equally as significant for most small
businesses as for larger ones.

Step Action
1 Protect against viruses, spyware, and other malicious code
2 Secure your networks
3 Establish security practices and policies to protect sensitive information
4 Educate employees about cyber threats and hold them accountable
5 Require employees to use strong passwords and change them often
6 Employ best practices on payment cards
7 Make backup copies of important business data and information
8 Control physical access to computers and network components
9 Create a mobile device action plan
10 Protect all pages on your public-facing websites and apps, not just the checkout and sign-up pages
Hiring/Leaving Your Present Position

• Proprietary Information:
• Any information that the company has successfully kept confidential and that is not
otherwise known to outsiders is likely to be protected by law as a trade secret. It may
include not only inventions and technology but also other valuable information such
as customer lists, pricing strategies, and unique operating methods.
• Many companies require their employees to sign agreements that specifically spell out
the employees’ obligation to protect trade secrets. The obligation to respect an
employer’s trade secrets and keep them confidential is imposed by law and is not
dependent upon contract. Furthermore, it continues after the employment
relationship has been terminated, for whatever reason, and indefinitely until the
information makes its way into the public domain by other means.
• Employers who require a confidentiality agreement from their employees generally do so as a
method of making sure that their employees are aware of their responsibilities in this regard.
• If an employee releases proprietary information to the outside, it is small comfort to the
employer that it may have the right to sue said employee for damages. And a requirement that
employees sign such agreements can be evidence that the employer has taken reasonable
steps to keep its information confidential, thus making the information more likely to be
deemed a trade secret.
Hiring/Leaving Your Present Position
Choosing an Attorney and an Accountant

• Many people perceive engaging an attorney and an accountant as unnecessary expenses when
beginning a new venture. However, the earlier you can consult these professionals, the more
likely your business will avoid costly mistakes.
• Engage the accountant as early as possible so s/he can establish the information management
systems and recommend the computer software that will get your company’s records off on
the right track. This gives you the tools necessary to gauge the success of your efforts against
budget before it is too late to adapt and avoids the expensive and frustrating task of
reconstructing the company’s results from fragmented and missing records at the end of the
year
Choosing a Name

• The choice of a name for a business may seem at first to be a matter of personal taste, without
many legal ramifications. However, since the name of a business is ultimately the repository of
its goodwill, the owner should choose a name that will not be confused with the name of
another business.
THANK YOU