2. Text Risks and how to deal with them

Dealing with problems. Every business firm 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 under-j stands 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:

– DAMAGE TO PROPERTY. 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 developments 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 businesspeople 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, situations 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 reserve 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 risks. In addition, Lloyd's of London will insure almost any nonbusiness 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.