Small Business Protection: Risk Management and Insurance

2. Risk in Small Business Risk is the very real likelihood that the business may not succeed Some business owners are risk seeking, although most small business owners are risk averse Business risk: probability that the future state of the business will be less successful than planned Conventional wisdom used to say that entrepreneurs are risk takers. However, entrepreneurs see themselves as taking only a calculated risk. Conventional wisdom used to say that entrepreneurs are risk takers. However, entrepreneurs see themselves as taking only a calculated risk.

3. Game of Risk Starting a business is a risk in itself, but getting a new company off the ground is the easy part Ramin Kamfar, who last year grew his Eaton, New Jersey-based company, New World Coffee-Manhattan Bagel Inc., from a robust $40 million-dollar business into a $400 million one "Risk is part of any business, and it's inherent in any job, whether you're an entrepreneur or a midlevel manager. The trick is to learn to manage that risk and to make sure that all risks are calculated risks." Game of Risk Starting a business is a risk in itself, but getting a new company off the ground is the easy part Loved ones could suffer consequences or reap rewards of a risk that you take Ramin Kamfar, who last year grew his Eaton, New Jersey-based company, New World Coffee-Manhattan Bagel Inc., from a robust $40 million-dollar business into a $400 million one New World spent $160 million to buy a bankrupt company who was in debt $30 million "Risk is part of any business, and it's inherent in any job, whether you're an entrepreneur or a midlevel manager. The trick is to learn to manage that risk and to make sure that all risks are calculated risks." Game of Risk Starting a business is a risk in itself, but getting a new company off the ground is the easy part Loved ones could suffer consequences or reap rewards of a risk that you take Ramin Kamfar, who last year grew his Eaton, New Jersey-based company, New World Coffee-Manhattan Bagel Inc., from a robust $40 million-dollar business into a $400 million one New World spent $160 million to buy a bankrupt company who was in debt $30 million "Risk is part of any business, and it's inherent in any job, whether you're an entrepreneur or a midlevel manager. The trick is to learn to manage that risk and to make sure that all risks are calculated risks."

4. Most commonly identified sources of risk: Financial risk Nonpayment of debts Changes in technology Injury and illnesses suffered by employees Injury from accidents incurred by customers Natural events (storms, floods, fire, earthquakes) Theft of business property Misbehavior by employees There are many things that can go wrong: just ask the victims of 2005 hurricane Katrina in New Orleans. Other risks may be special to certain industries such as tools stolen off a construction job site, customer injury in a rock climbing gym, or illnesses from hospital employees.There are many things that can go wrong: just ask the victims of 2005 hurricane Katrina in New Orleans. Other risks may be special to certain industries such as tools stolen off a construction job site, customer injury in a rock climbing gym, or illnesses from hospital employees.

5. Three general types of events that cause business risk: Events related to the property of the business Events related to personnel Events related to customers and others Each of these is discussed on the next slides.Each of these is discussed on the next slides.

6. 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 Events related to personnel: Theft, violation of government regulations, loss of key employees

7. Events related to customers and others: Risk from customers primarily arises from: Injuries suffered while upon business property Injury or damage that is caused during the use of the business’s products Product liability: payments for injury or damage that occurs during the use of the business’s products The firearms and tobacco industries have a difficult time obtaining liability insurance and do so at a very high rate due to the nature of their industries. Even when the products are used correctly, they are inherently harmful.The firearms and tobacco industries have a difficult time obtaining liability insurance and do so at a very high rate due to the nature of their industries. Even when the products are used correctly, they are inherently harmful.

8. Events related to customers and others: (cont.) Risk of nonpayment by customers is experienced by all business that offer credit Balance two conflicting things when you decide to offer credit: It will increase your sales Offering credit guarantees sooner or later some customer will not pay as promised Offering credit is, again, a two edged sword. At some point customers will not pay and may need to be turned over to collections. This loss results in higher costs for future customers. Offering credit is, again, a two edged sword. At some point customers will not pay and may need to be turned over to collections. This loss results in higher costs for future customers.

9. 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 Limit both the possibility the risk will occur and the damage that will occur if it does. Think of it this way: In a car you drive defensively to prevent and accident. But you also wear your seatbelt to minimize the risk of injury should you be in an accident despite your preventive measures. Limit both the possibility the risk will occur and the damage that will occur if it does. Think of it this way: In a car you drive defensively to prevent and accident. But you also wear your seatbelt to minimize the risk of injury should you be in an accident despite your preventive measures.

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

11. Managing risk to tangible property: Land and buildings can be damaged or destroyed Equipment can be stolen Small items of high value can be stolen Managing risk to buildings and land: Protection may be obtained through such measures as installing smoke alarms and sprinkler systems

12. Managing risk to Computers and Data: Riskiest areas of business involves computers connected to the internet Protecting your PC by installing a: Firewall Antivirus program Antispyware program Simplest answer is to buy an all-in-one collection of security programs Norton Internet Security ZoneAlarm Internet Security Suite

13. Managing risk to intangible property: Intellectual property rights comprise the legal rights to use unique features of products of services that provide competitive advantage Problem is that no government agency will assist you to maintain your legal rights Two things to protect from theft: Physically protect your property Develop rules that prevent employee theft

14. Theft Prevention Shoplifting, employee theft, and theft in any form costs companies billions of dollars in lost revenues and profits each year Instructional classes can be taught in a group format that would include the business owner, management, and staff at the client’s location during nonbusiness hours Theft prevention firms specialize in very in-depth and costly theft prevention programs as a method to separate their service from potential competitors Theft Prevention Shoplifting, employee theft, and theft in any form costs companies billions of dollars in lost revenues and profits each year Initiating a consulting service that trains business owners and staff how to prevent thefts and what to do in the event of a theft is a very good venture to set in motion instructional classes can be taught in a group format that would include the business owner, management, and staff at the client’s location during nonbusiness hours theft prevention firms specialize in very in-depth and costly theft prevention programs as a method to separate their service from potential competitors Theft Prevention Shoplifting, employee theft, and theft in any form costs companies billions of dollars in lost revenues and profits each year Initiating a consulting service that trains business owners and staff how to prevent thefts and what to do in the event of a theft is a very good venture to set in motion instructional classes can be taught in a group format that would include the business owner, management, and staff at the client’s location during nonbusiness hours theft prevention firms specialize in very in-depth and costly theft prevention programs as a method to separate their service from potential competitors

15. Sources of Theft

16. Managing risks resulting from events involving personnel: Screen potential employees: background checks, drug tests, psychological tests No hiring process is 100% foolproof 2004 study (the Wells Report): most costly employee frauds occur in business with fewer than 100 employees Internal Control: primary method of ensuring honesty in employees Owners choose the people to hire, screen them, train them, pay them, and still they betray you. Background checks and drug checks can reduce your risks but not eliminate it. Checks and balances and your constant presence will also help reduce the risk. Owners choose the people to hire, screen them, train them, pay them, and still they betray you. Background checks and drug checks can reduce your risks but not eliminate it. Checks and balances and your constant presence will also help reduce the risk.

17. Managing risk from violations of tax regulations: limit your exposure Keep complete, accurate accounting records: Control access to accounting system File all source documents Establish a relationship with both an accountant and lawyer who are expert in tax issues Make paying your taxes your first financial priority The government is one sleeping giant you don’t want to wake. The accounting software discussed earlier in the book helps owners to keep track of their records and can remind them when it is time to make payments. Many accountants also offer a service to call and remind you when taxes are due or when it’s time to bring in a backup of your record so they can calculate the taxes for you.The government is one sleeping giant you don’t want to wake. The accounting software discussed earlier in the book helps owners to keep track of their records and can remind them when it is time to make payments. Many accountants also offer a service to call and remind you when taxes are due or when it’s time to bring in a backup of your record so they can calculate the taxes for you.

18. Managing risk from employee violation of government regulations: Reducing risk is best accomplished through a proactive program of training and enforcing appropriate policies and procedures You are financially responsible for employee violations, intentional or inadvertent Few cases where employer has been held harmless all involve employers who: Have a written policy provided to each employee Have conducted training of managers and employees concerning those policies Have immediately and consistently acted upon receipt of any complaint Employees are your company representatives. As such you need to train them and teach them what is expected and tolerated. Some insurance companies will give discounts to companies that participate in formal training for legal issues such as sexual harassment.Employees are your company representatives. As such you need to train them and teach them what is expected and tolerated. Some insurance companies will give discounts to companies that participate in formal training for legal issues such as sexual harassment.

19. Managing risk from employee violation of government regulations: Assistance can be obtained from experts: SCORE: www.score.org EEOC maintains a website that contains myriad resources for small business owners HR Personnel Managers or Supervisors EEOC stands for Equal Employment Opportunities. EEOC requires ‘reasonable accommodation’ but does not specify what that is. Make use of the website to check both federal and state laws. There are also industry specific laws. HR personnel, those who screen and hire, managers, and supervisors, are the most important employees to receive this training. EEOC stands for Equal Employment Opportunities. EEOC requires ‘reasonable accommodation’ but does not specify what that is. Make use of the website to check both federal and state laws. There are also industry specific laws. HR personnel, those who screen and hire, managers, and supervisors, are the most important employees to receive this training.

20. Managing risk from employee violation of government regulations: Must also keep accurate records of all employee job-related illnesses Must report within eight hours any accidents resulting in fatalities or in hospitalization of three or more employees

21. Insuring Against Risks Use of insurance can minimize the damage that such risks can cause Using insurance to manage risks: Insurance provides a benefit by requiring a relatively small fee compared to amount of loss The more likely an event is to occur, and the greater the potential amount the insurance company must pay, the higher the price you must pay for coverage

22. 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 Start with what risks you face. St Louis companies make need earthquake insurance, but not hurricane insurance. Most retail companies need a general level of customer liability insurance. Rock climbing gyms and gun stores need more. In fact, in the firearms industry some manufacturers require their distributors to carry a minimum of $10 Million in liability insurance. Worker’s compensation insurance will rise as claims against it rise but it is required insurance. Doctors are the most common users of malpractice insurance. In fact, many Obstetricians are now refusing to deliver babies because of the risks associated to it and the cost of malpractice insurance to cover it. $500,000 annually is not unheard of in the medical industry.Start with what risks you face. St Louis companies make need earthquake insurance, but not hurricane insurance. Most retail companies need a general level of customer liability insurance. Rock climbing gyms and gun stores need more. In fact, in the firearms industry some manufacturers require their distributors to carry a minimum of $10 Million in liability insurance. Worker’s compensation insurance will rise as claims against it rise but it is required insurance. Doctors are the most common users of malpractice insurance. In fact, many Obstetricians are now refusing to deliver babies because of the risks associated to it and the cost of malpractice insurance to cover it. $500,000 annually is not unheard of in the medical industry.

23. Insuring the property of the business: Commercial property insurance covers losses to the business property from causes such as fire, storm, vandalism, and theft Insurance is determined: Property’s insurable value Amount of deductible loss Amount of co-insurance required Loss limits of the policy

24. Insuring the property of the business: Business interruption insurance: funds to pay the ordinary operating expenses of your business should it be forced to close temporarily Crime insurance: protection against losses from crimes committed against your business Theft insurance: normally included in insurance on physical assets Crime insurance may include employee misconduct insurance to prevent incidents such as embezzlement. Other policies may require bonding employees who handle large amounts of money.Crime insurance may include employee misconduct insurance to prevent incidents such as embezzlement. Other policies may require bonding employees who handle large amounts of money.

25. 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

26. 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 Disability: usually part of life insurance; stand-alone or part of medical coverage Medical: most highly desired form of insurance for most employees

27. Sharing Risks Very effective method to reduce and to control business risk is to share that risk with other entities By forming joint ventures, by joining industry groups, and by obtaining government grants and guarantees

28. Summary