Учебное пособие для студентов вузов Допущено Министерством образования Республики Беларусь в качестве учебного пособия для студентов экономических специальностей высших учебных заведений

UNIT 11. Risks and how to deal with them

Risk can be defined as the chance of damage¹, injury, or loss. 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 understands the risks to which it is subject. Once these are known, a policy can be established on how best to handle² 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 inventory³ 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 riots⁴.

– liability⁵ 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 receivable⁶ 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, securities⁷, 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 style⁸ 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-insurance⁹. Under a self-insurance plan, a speci­fied amount is set aside¹⁰ in a reserve fund each year to be available to cover any losses incurred.

– Purchase Outside Insurance. An insurance policy¹¹ 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 hedging¹². 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.

1) How can risks be defined?

2) What risks are faced by the small firms?

3) What is the best way to protect a business against the risk of financial hardship?

4) What can be done to handle the risks?

5) What are the most effective ways of keeping losses to a mi­nimum?

6) What is meant by "shifting the risk" as a means of coping with possible loss?

2. In each of the following, select the word or phrase that best completes the statement or answers the question.

1) What of most small firms is represented by its inventory and buildings?

a. the property c. the capital

b. the workforce d. the fund

2) Who gives employers responsibility for the health and safety of employees when they are performing their duties?

a. the firm c. the state

b. the manager d. legislation

3) Protection against losses due to inability to collect accounts receivable can be

a. well-organized c. cheap

b. expensive d. well-done

4) Losses through dishonest employees can be in the form of

a. cash c. securities

b. merchandise d. all of these

5) When business owners are aware of the existing risks they may

a. appeal to the insurance company

b. pay their attention to the matter of how to handle them

c. run their business successfully

6) A self-insurance plan is

a. a plan to cope with losses

b. a capital spending plan

c. a specified amount set aside in a reserve fund each year

7) Fire Insurance is property insurance that covers risks of

a. the damage of water c. the damage of smoke

b. fire d. all of these

8) Hedging is a device to

a. run business c. make profits

b. protect profits d. keep accounting records

WORD STUDY

3. Match the words with their definitions.

inventory, property, account receivable, hedging, profit, damage, legislation, expensive, securities, self-insurance

1) The difference between the price received for a product and the amounts paid as rewards to the factors of production.

2) An operation adopted by merchants and others in the commodity markets who deal in futures to protect themselves against risk of loss, caused by future changes in price.

3) Any thing that has value and can be owned, including things having substance, such as land, money, etc.

4) Investments generally, especially stocks, shares and bonds which are bought as investments.

5) The accumulation of a fund of money as a reserve to provide for possible losses in the future that could easily have been insured with in insurance company.

6) Stocks held by a business for sale to its customers; a detailed list of things.

7) Dear; costing much money; needing great expense; high priced.

8) Laws, especially statute laws, i.e. Acts of Parliament in Britain, Acts of Congress in USA.

9) A sum of money due to be received from a customer in the ordi­nary course of trade but not yet paid.

10) Harm; loss of value caused by being broken or spoilt.

4. Supply the sentences with the missing words

risk, damaged, responsibility, premises, debt, protection, liquidity, set aside, hedging, commodity

1) It was evident that it had created ... problems.

2) In 1991 the firm moved to new ... in Bethnal Green.

3) Labour is bought and sold like any other ... .

4) Such a response would be an irrational ... .

5) Their failures in this area have ... their self-confidence and credibility.

6) This deposit provides a way of ... against fluctuating interest rates.

7) You must spend less until your ... are paid off.

8) I made a mistake and I will assume ... for it.

9) This policy gives you ... against loss of earnings due to sickness or unemployment.

10) The government ... barely thirteen percent of this money for health and education.

5. What are the opposites from the text of the following words?

maximum	illegal	rarely
exclude	carelessly	ability
cheap	bad	favourable
disadvantage	many	descrease
wrong	withdraw	failure

venture	regularly	obligation
kind	significance	bonds
for example	unfavourable	ruin
raise	qualified	entire
function	fix	boundary

a) … transfer is paying losses with funds that originate outside the organization. By purchasing insurance, companies transfer the … of loss to an insurance firm, which agrees to pay for certain types of losses. In exchange, the insurance firm collects a fee known as a pre­mium. Proper … management nearly always requires a combination of at least one …-control technique and at least one …-financing technique.

b) In … management, it is useful to distinguish between insurable and uninsurable … . Outside insurers are not eager to promise that they will pay for losses unless there is some reasonable expectation that they won't have to. Most (but not all) pure … are insurable; in general, speculative … are not insurable.

GRAMMAR FOCUS

8. Complete the following sentences with an appropriate modal verb.

1) Entrance is forbidden. You ... not enter.

2) Success is possible. We ... be successful.

3) Participation is compulsory. We ... to take part.

4) Permission is given. You ... take the afternoon off.

5) Success is probable. We ... succeed.

6) He has the ability. He ... win the competition.

7) Participation is voluntary. We ... to go to the reception.

8) Failure is impossible. We ... fail.

9) Permission is not given. You ... leave the building.

1) We have cut prices dramatically.

2) They are outselling us in all sectors of the market.

3) We may lose our dominant position.

4) We have seen a gradual erosion of our position.

5) We will take market share from our competitors.

6) We are bringing forward our monthly meeting.

10. Complete the following sentences by putting the verbs in the right form.

1) If the project (fail), we (lose) a lot of money.

2) We (can) extend the payback period if we (adopt) an ARR method (Average rate of return).

3) We (get) a truer picture if we (take) into account present values of money.

4) We (not invest) unless we (foresee) a realistic chance of long-term profits.

5) As long as the project (be financed) from outside sources, we (have to) ensure a much higher rate of return.

6) If we (lose) money in the first two years, we (start) to doubt the viability of the project.

7) Unless we (be committed) to the project long-term, we (not carry) it through.

8) Breakeven point (come) a year earlier if we (manage) to reach these sales targets.

DISCUSSION

1. When is self-insurance a practical idea?

2. Should you protect against all risks by buying insurance?

3. If you were the owner of a business that was subject to all risks listed in the text, which ones would you try to eliminate, which ones would you be willing to absorb, and which ones would you transfer to an insurance company?

1. Write a summary of the text.