1. Meaning and nature of business risk For business owners -
risk is real likelihood - business may not succeed lose part lose
all Some seek risk - most entrepreneurs - risk adverse. If they
cannot reduce level of risk, they are likely to: Insure Share
17-2
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Business risk Level of probability that the future economic
state of the business will be worse than expected. E.g. Sales
projections are not met Products do not meet spec. Investments* go
bad. 17-3
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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
Misbehavior by employees Loss or harm use product or service Theft
of business property Violation of laws Natural events (storms,
floods, fire, earthquakes) 17-4
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2. Risks Associated with Specific Business Operations 3 general
events: Property of the business Personnel Customers and others
17-5
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a. Events Related to Property Every business owns thing of
value A retail inventory A manufacturing business production
machinery Other businesses furniture, office equipment, vehicles,
buildings, land, intellectual properties. 17-6
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Each of these types of property involves specific forms of risk
Inventory - be stolen Machinery - break Buildings - be damaged /
destroyed Land - become contaminated Patents - be infringed upon
17-7
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b. Events Related to Personnel i. Theft ii. Violation of
governmental regulations ii. Loss of key employees 17-8
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i. Employee theft a fact of life May be a direct act of
removing property from a business e.g. small items or an illegal
act that provide personal benefit at a cost to the business e.g.
embezzlement or fraud 17-9
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ii. Loss of key employees occurs if someone quits, retires,
dies or becomes disabled. In some cases - could lead to bankruptcy
and business dissolution. Competition constant risk Especially
understand business skilled tempted to become competitors
17-10
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iii. Law and governmental rules - limit the freedom of business
owners to manage their businesses as they please. It has become a
source of significant business risk over the last 30 years.
17-11
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Given the complex, ambiguous and sometimes contradictory nature
of the regulations - violation could occur (inevitable). LHDN
(Inland Revenue Board of Malaysia) and Labor Department are known
as agencies - to cause most headaches for small businesses
17-12
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FOUR strategies regarding compliance: To stay small -
regulations do not kick in. Some owners try indifference not to
spend time on compliance, when the face government action, close
the business. ***The riskiest government agencies can come after
the owner 17-13
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Others proactive - seeking help from the professional do
assessments to check for compliance. Fight for what you believe is
right. It is not suitable for a faint of heart short of cash.
17-14
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iii. Events Related to Customers and Others Events related to
customer and others (vendors and even trespassers) occur in several
ways: Injuries may be suffered while upon business property. May or
may not be your fault. Even - a customer does something
unreasonable like climbing on shelves to reach something can be
liable. 17-15
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Injuries / damaged by the use of products or services.
***product liability. Magnitude of losses has increased greatly
manufacturer Lawsuits may be individual or class action suits (a
large group of people) - the latter being more common. 17-16
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Risk of nonpayment by customers - experienced by all businesses
that offer credit Must balance: giving credit to customers -
increase your sales offering credit - guarantees sooner or later
some customers will not pay as promised. 17-17
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3. Techniques to Manage Risks? 17-18
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Cannot be avoided they can be managed. Best strategy - develop
a business environment that MINIMIZES: Probability of the event
occuring Amount of loss - can be experienced if the event does
occur 17-19
Slide 20
How? Making specific plans and arrangements to deal with
foreseeable events Creating and enforcing an appropriate code of
conduct Ensuring valuable assets are physically secured Actively
working to get rid of any physical hazards (chemicals, poisons
etc)
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a. Managing risks to tangible property - depends on nature of
asset. Buildings and land: Protect from fire with smoke alarms,
sprinkler systems and being near a fireplug. Protect from flood by
not locating on a flood area - inspecting plumbing systems.
Protection from storms by rigorously enforcing building codes. E.g.
choice of materials 17-21
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Computers and data: Firewalls, Anti-virus, Anti-spyware
programs Encryption Taking care of the human element: Train
employees - only safe surfing. Download from trusted sources.
Passwords should be complex - hidden away if written. Automatically
lock down when inactive for a period of time. Back up data daily
17-22
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Intellectual property can be done through patents, copyrights
and other registration procedures. Intellectual Property
Corporation (myipo.gov.my) Responsible to regulate and supervise
issues or matters relating to Intellectual Property Must be
prepared to make immediate written objections to the infringement.
17-23
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Intellectual property rights comprise - legal rights to use
unique features of products or services - competitive advantage.
17-24
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Guarding against obsolescence - watching what is going on in
the industry. Protection property - from theft can occur in several
ways: Adverse possession legal way - allowing a non-owner to use
property as if it were his own period of time. Institute separation
of duties to make it difficult for an employee to steal. 17-25
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Managing Risk Resulting from Events Involving Personnel 17-26
Starts by careful screening and hiring practices. PREVENT tempting
employees by instituting business practices - make theft difficult:
Internal control - a set of rules and procedures to limit
opportunity for employee theft. Separation of duties - a form of
internal control - separates physical control of an asset from the
person accounting for that asset. Keeping valuable property in a
secured location - reduces temptation.
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Sources of Business Theft 17-27 Figure 17.2
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Percentage of Frauds by Method of Detection 17-28 Figure
17.3
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Risk of losing key personnel can be done through employee
contracts: Limit the employees freedom to go into competition (e.g.
non-compete agreement). Contain employees specific promise to not
disclose sensitive or confidential information. Provide rewards for
providing adequate time termination notice - replacement. Cross
training of employees - reduces shock to the business should a key
employee leave unexpectedly. 17-29
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An internal audit a way to keep risks at a manageable level.
Should consider outsourcing to an expert. A properly conducted
audit - give business owner valuable information - various risks
and recommendations for more effective and efficient use of
resources. Once its determined to use an external company, steps
should be taken to carefully describe his role. 17-30
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A properly conducted, independent internal audit benefits: An
evaluation of overall level of business risk. An objective
evaluation of risk control structure. A systematic analysis of
business processes and controls. Information on irregularities
detected during the audit process. 17-31
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Managing Risk from Violations of Tax Regulations Keep complete,
accurate accounting records Establish a relationship - an
accountant and a lawyer who are expert in tax issues Make paying
taxes the first financial priority 17-32
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Managing Risk from Employee Violation of Government
Regulations: Ignorance of employee actions is not a defense. The
only defense to ever hold an employer harmless is: Having a written
policy provided to each employee. Conducting training to each
employee. Having immediately and consistently acted upon receipt of
any complaint. 17-33
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4. How to Use Insurance ? Insurance - tool to minimize the loss
from potential risks. Key - buying enough coverage, but not wasting
money by buying too much. Not every loss is insurable. 17-34
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Insurance A contract between two or more parties in which one
party agrees, for a fee, to assume the risk of another. Takaful - a
mutual assistance scheme based on the spirit of brotherhood and
solidarity, where participants agree to assist each other
financially in case of predefined events taking place. With this
intention in mind, participants pay contribution on the basis of
tabarru (donation) to the General Takaful Fund managed by Takaful
company (e.g. Etiqa Takaful Berhad). 17-35
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Developing a comprehensive insurance policy means: E.g. car
insurance Understanding risks to which your business is vulnerable.
Amount of loss you could suffer. Finding competitive rates for this
coverage. 17-36
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Determining which risks to cover: Mandatory coverages : Vehicle
liability Property, Injury Unemployment insurances* Desired
coverages : Product liability harmed by product Malpractice harm
caused during performance by professionals Credit only applicable
for manufacturers* 17-37
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Theft insurance For most assets - covered under property
insurance. Cash cannot be insured. Two types of insurance bonds
Fidelity and Surety. 17-38
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Fidelity bonds Bonds - called dishonesty bonds - repay
employers for losses caused by dishonest or negligent employees.
Cover losses from employee fraud, theft, forgery, and embezzlement
17-39
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Surety bonds e.g. bank guarantee A surety bond - a promise to
pay one party (the obligee) a certain amount if a second party (the
principal) fails to meet some obligation, such as fulfilling the
terms of a contract. Surety bond protects the obligee against
losses resulting from the principal's failure to meet the
obligation. 17-40
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Property insurance - cost is determined by: Insurable value
Amount of an asset for which a company will write an insurance
policy Amount of deductible loss An amount of loss that will not be
paid by an insurance company E.g. Pay amount of loss a deductible
17-41
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Property insurance (continued) Amount of co-insurance A
contract requirement that works to prevent property owners from
deliberately underinsuring 17-42
Slide 43
A math formula: A building actually valued at RM1,000,000 has
an 80% coinsurance clause but insured for only RM750,000. Since the
insured value < 80% of its actual value, when suffers a loss -
insurance payout will be subject to the underreporting penalty.
E.g. It suffers a RM 200,000 loss. The insured would recover
750,000 (.80 1,000,000) 200,000 = RM 187,500.
Slide 44
Credit insurance - manufacturer Covers abnormal losses from
credit customers not paying their bills Buyout insurance Insurance
that provides money to owners of a business to buy the shares of
any deceased owner from that owners heirs. 17-44
Slide 45
Personnel insurance Key person insurance (SOCSO) protects you
in the event that a key employee dies or is disabled and cannot
work Life insurances provided to employees to provide security for
their families Medical coverage 17-45
