11. Risks

RISKS 11

Risk can be defined as the chance of damage, injury, or loss. Every business firms operates with daily risks, and the small firm is no exception. The small firm is characteristically less able to absorb losses from risks. These facts make it very important that every  small firm understands  the risks to which it is subject. Once these are known,  a policy can be established on how best to handle the risks so as to keep losses to a minimum.

Risks faced by the small firm:
- d a m a g e  to  p r o p e r t y. the property of most small firms is represented by its inventory and its building if it is owned by the firm. The building and the inventory  are constantly subject to the risks of damage and loss from fire, theft, floods, hurricanes, and riots
- liability to employees. All employers are responsible for the health and safety  of employees while  they are performing their duties for the firm. Legislation giving employers such responsibility has been one of the greatest development in social responsibility in recent years.
- Liability to the public. This type of risk is often illustrated by the proverbial slip on a banana peel by a customer in the store. Store owners are liable for injuries received by persons on their premises. This liability applies to apartment houses, factories, and wholesale establishments as well as to retail establishments. This risk includes not only physical injuries, but also damage to the property of others.
- Excessive loss from bad debts. We have noted  the importance of extending credit  carefully and on the basis  of a well- established procedure. Losses due to inability to collect accounts receivable can be severe. Protection against such losses can be expensive.
- Loss through dishonest employees. No business people like to admit they have dishonest employees. However, countless cases of employee theft are reported every year. Such losses can be in the form of cash, securities, or merchandise. This is another real risk that must be recognized and coped with.
- Financial hardship. Financial hardship has probably  caused more small firms to go out of business than any other single risk. It is especially sad to see a firm with otherwise excellent prospects suffer because the lack of liquidity has been allowed to dominate its financial condition.
- Marketing risks. Marketing risks cover such things as having an inventory of merchandise suddenly fall in value because the market price has dropped. Having a location lose its value is also a marketing risk. In the sale of style merchandise, situation occur when the style has fallen out of favor and the remaining merchandise on the owner’s shelves has lost most of its value.

When the existing risks are known, business owners may  turn their attention to the matter of what to do about them. They will realize that  some risks are easier to control  than others. In all cases good management will do some of the following:
- remove  the cause.
- Create  self-insurance. Under a self- insurance plan, a specified amount is set aside in a reverse  fund each year to be available to cover any losses incurred.
- Purchase outside insurance. An insurance policy  shifts the risk to the insurance company. Insurance can be purchased from established insurance firms to cover many of the risks listed here. These are considered normal  business risk. Lloyd’s of London will insure almost any non-business risk – for a price.
- Practice hedging. Any small firm that buys quantities of products quoted on the nation’s well – established  commodity exchanges should know about hedging and should practice it  to protect normal profits. Hedging is often misunderstood as a device to make profits, but it is only to protect normal profits.
- Good management. Good planning and good management are probably the best protection against  most of the other risks that have been considered. For instance, good management will keep itself informed of price trends; good accounting records and study of operations against a budget  will warn of any developing adverse trends. The risk of financial hardship can best be coped with by proper financial planning and financial management.