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AOF Entrepreneurship

Lesson 7Managing Business Risk

Student Resources

Resource Description

Student Resource 7.1 Vignette: Business Risks

Student Resource 7.2 Organizer: Business Risks

Student Resource 7.3 Reading: Business Risks

Student Resource 7.4 Risk Assessment: Tam’s Vietnamese Kitchen

Student Resource 7.5 Organizer: Business Insurance

Student Resource 7.6 Reading: Business Insurance

Student Resource 7.7 Culminating Project Work: Risk Assessment

Copyright © 20092015 NAF. All rights reserved.

AOF EntrepreneurshipLesson 7 Managing Business Risk

Student Resource 7.1

Vignette: Business Risks Student Name:_______________________________________________________ Date:___________

Directions: Read the following example about a new restaurant business. Mark the clues about the types of risk the business faces by underlining or circling relevant phrases or passages. Then review the parts you have marked and identify the top three risks to the business. Finally, answer the questions at the bottom of the page.

Tam Nguyen walks into her new Vietnamese restaurant around five o’clock to see how things are going, just as it opens for dinner. As she walks in, she notices that the waitress is seating some customers and has left the cash register open and tip jar unattended.

Tam walks around toward the kitchen to say hello to the cooks. They are busy rushing around and preparing rice and soup and chopping vegetables for the other dishes. She watches one of the cooks slide a sharp cleaver and cutting board into the sink and then fill the sink basin with hot water and soap.

The cook then walks over and exchanges greetings with Tam. He seems a little concerned. “There was an article in the paper today,” he says. “There is a sickness related to peanut products that come from a certain factory. We have many peanut dishes on our menu, but we don’t know if our peanut sauces were sourced through that factory. Do you think it’s safe to serve them to customers?”

Tam wonders if she should call the local Food and Drug Administration office to find out, and promises she’ll look into it.

“The soup smells wonderful tonight,” she says to reassure him, walking past the simmering pot on the stove. Then Tam opens the refrigerator to check on the jars of peanut sauce and find out who manufactures them, and she also notices that the shelves are overflowing with vegetables and other foods that will probably go bad before they can be served. “We ordered too much this week,” she says to herself.

As she walks back out to speak with the waitress, her glance falls on the smoke alarms above the kitchen door. She has been meaning to test the alarm batteries for some time, but she doesn’t want to do so when customers are around because the loud noise might upset them.

At the register, she watches a customer hand over a $100 bill, and her waitress makes change for the man and shoves the bill under the cash drawer.

From there, Tam sits in the back of the restaurant and goes over the business’s financial statements from its first two weeks in operation. The business so far has met and exceeded its sales expectations and earned positive reviews from local food critics, ensuring that it will continue to have customers. However, she has also been spending more on supplies than expected. Last week some equipment broke, and she had to front the money to replace it. So although the business has customers, it is still short on cash. In addition, one of her competitors less than 15 minutes away has offered customers 2-for-1 meals and has begun to offer heavily discounted specials.

Tam is a bit worried, but she thinks that aside from the small cash flow issue, things are going well.

Do you think things are going well with this business? What risks would you point out to Tam if you were helping her with the restaurant?




Organizer: Business RisksStudent Name:_______________________________________________________ Date:___________

Directions: Use this organizer to take notes as you watch the presentation on business risks.

Type of Risk or Prevention Strategy

Description




Reading: Business Risks

This presentation introduces the steps for risk management and identifies several key business risks that new companies face.



One quality common to most entrepreneurs is that they are willing to take risks. A new business is risky, because there are many things that can go wrong, and no one can foresee exactly what will happen. By investing money and time into their business, entrepreneurs take a risk that they will lose or waste resources. But entrepreneurs are guided by hope and ambitions to see their investment pay off in success and profits, which they can share with their investors, business partners, family, and friends.

In order to realistically operate a business, entrepreneurs should be aware of the risks and uncertainties involved. Sometimes risk is defined as the uncertainty involved in a new venture. It’s also defined as the degree of exposure to loss or damage that a business faces. Sometimes it makes sense to take a large risk. For example, investing more money up front in good market research, high-quality equipment, and a solid marketing campaign can pay off handsomely. By investing more in smart ways, entrepreneurs can earn more, too. But just because an entrepreneur invests in his or her business doesn’t make it an instant success.

Businesses face risks that are controllable, such as flaws in their business plan, as well as risks they can’t control, including changing market conditions and natural disasters. By carefully identifying and managing risks, businesses have a greater chance of overcoming risk and achieving success.



Risk assessment: Managers identify risks that can threaten a business, and they assess the probability and impact of each risk. Managers should create a plan to address the risks likeliest to occur, either immediately or in the future. They must also regularly review and revise the risk assessment strategy based on the changing needs and risks of the business.

Risk prevention: For each risk identified in the initial assessment, business managers should identify several ways the risk could be addressed and choose a strategy that is most effective, considering the costs and risks involved. Risk prevention includes purchasing insurance coverage, training employees, and providing product safety warnings.

Risk recovery: No matter how well a business plans for and prevents risks, some incidents will always occur, and businesses need to create a strategy for recovering from them. First, businesses should plan a strategy for how to help buffer the damage in an emergency and develop a plan for recovering from an incident. It’s important for businesses to train their officers and employees about their recovery strategies so that people know what to do when something happens.

Since businesses operate in changing environments, the risk circumstances will also change, and the risk management plan will need to be adjusted regularly.



The types of risks a new business faces are numerous, and there are many different ways to categorize them; the table above is just one method. Some risks affect all businesses—for example, changing market conditions. What if there’s a strike and you suddenly can’t get supplies that you need? What if a new invention takes off and makes yours obsolete? What if another company just like yours opens up in town?

In many cases, a regular examination of every aspect of a business yields the best solution. You will know if an employee is not performing well if you track customer comments and sales while the employee is at work. You will know if your business structure needs adjusting if your management team is in constant disagreement. Your financial goals need another look if they are consistently not being met.

In others cases, preparation is the answer. If your business is located in an actual building instead of online, you need insurance to protect you from fire and storm damage. You may need insurance against theft and vandalism as well.



The old VHS cassette players went out of business with the advent of DVDs, which are losing business every day because people can see movies on their computers and TVs without them. You can’t anticipate a new invention, but you can pay attention to trends. If you were a savvy movie rental store, you’d stock up on DVDs and phase out VHS cassettes to make a profit. How might you think ahead to stay in business when nobody rents DVDs any more?

These are business model risks. Businesses must be aware of the trends in their industry and understand how their products fit into their market. They need to be able to market their products effectively to customers and keep up with the changing market.

To prevent accidents, businesses abide by all laws and safety regulations. They check their equipment and products carefully. They train everyone in the business on safe procedures. And they buy insurance when appropriate.



Entrepreneurs need to set goals for measuring success and for identifying risks. If you are a new business, you will want to set financial projections of the sales you hope to earn over a given period, for example, each quarter for the first year. By writing down specific sales projections, you can set a measurable goal for your business to achieve. You will also recognize if your goals are at risk. If you don’t make that number of sales, that doesn’t mean your business fails—only that you can adjust your figures accordingly. These figures are benchmarks, or a standard figure that you hope to meet.

If a business doesn’t meet its goals, the managers need to consider why. Once they understand the reasons, they can adjust their business practices to be more successful and adjust their projections to make sure their estimates are still realistic. For example, by setting benchmarks for earnings each quarter in the fiscal year, a business will know whether it is going to make its annual goal for earnings. These timelines are important, and investors and other business partners will want to have an update to see how the business is doing on a regular basis.



Creating a risk assessment plan is partly for the benefit of entrepreneurs in planning the success of their business. It also shows investors and others that the entrepreneurs are aware of the risks they face and able to strategically address and plan for those risks.

Entrepreneurs can help manage their risks by maintaining an awareness of which risks are within their control and which are outside of their control. Many of the risks that entrepreneurs encounter are a result of ineffective strategy or planning. Sometimes an entrepreneur won’t know what strategy works best until it’s tried, so the key to success is to adjust and improve on the business as it develops. For example, an entrepreneur can adjust prices, advertising strategy, product packaging, or suppliers to adapt to the changes in the local market.

Some risks are uncontrollable and might include emergencies such as fire, or changing market conditions such as economic disasters, shortages of raw materials, weather, changes in consumer tastes, or acts of terrorism. However, entrepreneurs can plan what they will do if these events occur and have a recovery strategy on hand to help their business adjust and recover. The planning process needs to be revisited regularly and is always a learning experience for the entrepreneur.




Risk Assessment: Tam’s Vietnamese KitchenStudent Name:_______________________________________________________ Date:___________

Directions: Imagine that you have spoken with Tam Nguyen and pointed out some of the many risks you have noticed in her new restaurant. As a result, Tam decides to hire a professional consultant to help her assess risks and find solutions to make sure her business continues on its path to success. She invites you to sit in with her and the consultant to help determine the risks and find solutions. Help Tam work with the consultant and identify the goals and strategies for her risk assessment plan.

Example: Risks and Remedies for a CaféTam’s new consultant realizes that being able to identify risks and then come up with ways to protect the business against them takes some practice. She provides Tam with the following example of a risk assessment done for a café. It helps Tam understand how to look at her business from the perspective of risks and solutions.

Risk Who It Affects Actions to Take

Slips and falls Employees, customers Keep floor clean and dry

Put up signage when floor is wet from mopping

Keep equipment in good order to prevent leaks

Have good drainage channels

Keep well lit

Kitchen accidents Employees Train staff in how to handle hot oils and clean fryers

Train staff in general safety procedures and have safety tips posted in a highly visible place

Provide heat-resistant gloves and aprons

Have hair pulled back

Fire Everyone Have premises inspected by the fire department

Have fire alarms and smoke detectors in good working order

Have fire extinguishers available in key kitchen locations

Install sprinkler system

Train staff in safe evacuation procedures

Take out property insurance



Natural disaster (storm damage, flood, earthquake, tornado)

Everyone Review evacuation procedures with staff

Take out flood insurance

Embezzlement, fraud Employees Perform thorough background checks prior to hiring

Have strict accounting procedures

Require double signatures for checks and invoices

Insist that management be fair and honest and lead by example

Technology problems Employees, management

Have surge protectors

Have offline and online data backup systems

Change passwords regularly

Consult with IT professional every six months

Install malware and spyware programs

A new café opens nearby

Employees, management

Keep customer service at high levels of satisfaction

Conduct research to keep pace with new dining trends

Target marketing efforts

Reward loyal customers with personalized service and special deals

Keep prices competitive

Make sure food is fresh and attractively prepared

Maintain employee morale so that they provide great customer service

Financial goals not met Management Adjust inventory to reduce amount of food spoiling

Revisit marketing strategy to attract more customers

Monitor budget more frequently and adjust expectations

Reevaluate the business strategy to better match current business environment

Ensure that high-energy efficiency standards are in place to reduce operating costs



Benefits of Risk AssessmentTam’s consultant tells you that it’s good you spoke with her now. “By identifying risks early on, we can work carefully and strategically to prevent and mitigate those risks, and reduce the business’s exposure,” she tells you.

The consultant also explains that you have many documents at your disposal to help identify risks. Contracts, facility and equipment leases, local laws, and other documents can help you identify your objectives and identify the risks of not complying with agreements. You can also refer to other restaurants’ policies and benchmarks to help learn how to manage your risk. There are even example risk assessments online to draw from.

Tam’s new consultant tells you that there are benefits to risk management that go beyond the basics of just avoiding loss or damage to your business: “Planning out a risk management policy can help a business identify where its overall priorities are,” she says. “It helps managers focus on the practices that are critical to meeting their goals. Writing and sharing the policy among employees and managers also helps everyone understand their responsibility toward meeting these goals, and fosters good communication and cooperation.”

Help Tam by describing some of the main objectives you can identify for her risk assessment plan:

1. Employee safety

2.

3.

4.

5.

Risk Assessment for Tam’s Vietnamese KitchenDirections: The consultant gives you the following risk identification chart and asks you to help her identify the risks in Tam’s business, based on what you have seen and what you know about the restaurant business.. Help fill out the risk identification chart. Look at the vignette you read at the beginning of the class period for more details.

Tam’s Business Statement: Tam’s Vietnamese Kitchen is the only Vietnamese restaurant in the neighborhood, although there are several other excellent Vietnamese restaurants within a half-hour drive in the next town. Our goal is to serve good-quality food at a reasonable price for the neighborhood’s diverse community of Vietnamese and other Asian cultures. We also want to expose customers of all cultures to Vietnamese cuisine and turn them into fans. Our food is mostly authentic Vietnamese, although some dishes are hybrid with Chinese and Thai food to broaden our appeal with customers.

After two weeks in operation, we are exceeding sales goals, and we have received rave reviews from local food critics that have brought in a swarm of new and satisfied customers. However, our supplies and equipment have cost us more than expected and we are facing a cash flow shortage; meanwhile, our refrigerators are overflowing with too many bulk perishables. We are also concerned about the recent salmonella outbreak related to peanut products, since many of our dishes incorporate peanut sauces.



Health and safety risks

Risk Prevention measure or solution

Product (food and beverage) risks


Market risks (Is promotion successful? What is this restaurant’s competitive advantage and how could it be at risk in the future?)


Legal risks (Is the restaurant protected from theft, fraud?)




Financial (Are sales goals being met? Is cash flow adequate? Are costs on target?)


Monitoring ResultsTam and the consultant agree with you to start some new rules and practices for ensuring the safety of the business and its employees. For example, Tam will check regularly with the Food and Drug Administration’s website to see whether any food products have been reported for diseases or recalls so that the business can make sure its customers don’t get sick. Additionally, Tam will train her wait staff to make sure they know how to handle money properly, that they don’t accept large bills and don’t leave the front counter unattended. In the kitchen, Tam will set new policies for safety in using the equipment, ordering supplies, and handling food. She will also purchase fire insurance in case of a kitchen fire.




Organizer: Business InsuranceStudent Name:_______________________________________________________ Date:___________

Describe how insurance works and what entrepreneurs should know about it:

Compare different types of business insurance coverage:

Type of Insurance Description of Coverage



Type of Insurance Description of Coverage




Reading: Business Insurance

This presentation introduces different types of insurance coverage available to help businesses manage their risk.



To buy insurance, businesses pay a regular fee called a premium. Premiums are paid every month or every year. This is a fixed cost that a business will need to factor into its business plan and financial projections. A cost-benefit analysis and basic risk analysis can help managers decide whether insurance is valuable to them.

Whether a business needs a particular kind of insurance depends on the industry it’s in, where it’s located, and its business model. For example, if your business isn’t housed in an actual building, you won’t need property insurance.

A qualifying event is an event that is covered by the insurance you bought. If the business suffers a qualifying event under an insurance plan, the plan will pay out a set amount to the insurance holders. This money can help cover losses or the costs of related repairs, medical care, or other damages.



Different states have different regulations and laws concerning safety and insurance coverage. Disability, vehicle insurance, and workers’ compensation insurance are required in nearly every state.

Disability insurance protects companies and workers in case a worker is disabled and unable to work. The company is absolved of lawsuits, while employees are entitled to a payment from the insurance plan. This helps companies hire someone new to take the place of the injured employee during the recovery period.

Vehicle insurance can be purchased by an individual or a company. As with individual coverage, a company plan can cover accidental damage, collision coverage, or sometimes theft relating to company-owned vehicles.

Workers’ compensation is a type of care provided for employees injured on the job. Companies are required to buy into a state plan, and premiums are determined by the kinds of workers they cover and the risks involved in their jobs. When employees are injured on the job, the plan pays for their medical care until they can return to work. If many injuries occur, the premiums will go up. The coverage helps injured employees and also protects companies from lawsuits.



There are many types of insurance that protect businesses from loss:

• Property insurance: Different types of property insurance are available to cover loss or damage to physical property from theft or natural disasters. Fire, earthquake, and flood insurance are some examples.

• Interruption insurance will also pay net profits and expenses if a business is shut down for repairs, helping a company recover in an emergency.

• Casualty insurance: General liability coverage helps protect against lawsuits if a customer is injured on company premises or if an employee causes damage. It also covers costs for defending a business in court. Errors-and-omissions insurance also protects from mistakes made in advertising, while product liability insurance helps protect from claims for injuries caused by products.

• Life insurance: Helps a company recover if the founder, business partner, or key officer of the company dies.

• Bonding: Protects companies from problems related to employees, such as employee theft or work that is not finished as agreed.

• Health coverage: Businesses over a certain size are required to provide full-time employees and sometimes their families with medical or dental insurance plans.



Insurance can help a business prevent extreme losses, but it’s not free. An insurance premium is an example of a fixed business cost. The costs need to be calculated carefully and compared to the related losses a business could suffer if an event were to occur. If the cost of insurance premiums outweighs the probability of risk or the amount of loss that could occur, it may not be worth it to purchase the insurance.

Several different insurance providers should be assessed for prices and customer satisfaction. Discover, if possible, each company’s history of actually paying out claims to their clients. A part of the risk assessment should include the chances that the insurance provider will not pay out. It is not common, but neither are natural disasters. Legal costs for retaining a lawyer to represent the business should be included in the risk assessment.

The monthly premiums and any annual costs should be calculated and figured into a company’s financial projections and statements, and included in the business plan. This helps show investors that entrepreneurs are carefully considering their risks and working to plan a recovery strategy in case something goes wrong.

In addition to having an insurance plan, a company can help prevent disasters by keeping a cushion of ready cash on hand that can be used in an emergency. This is important if something goes amiss that’s not covered by insurance, or if the company needs money before the insurance comes through in a disaster situation. A cash cushion is also more flexible than an insurance plan since it can be used for anything the business managers approve.



When a company first starts up, it may be difficult to foresee the risks ahead, such as injuries, property damage, or other accidents. However, new entrepreneurs should consider these risks up front and plan ahead. The costs for insurance can be included in a company’s business plan as part of the financial projections, since the premiums entail a regular, fixed cost. They can also be included in a company risk management strategy.




Culminating Project Work: Risk AssessmentDirections: Work with your project team to develop a risk assessment strategy for your team’s business plan. Use the following steps to assess each risk your business faces, and then identify a strategy for preventing and recovering from the most significant risks. Discuss the first four steps of this checklist together. Then write your risk assessment plan on your own

Risk Assessment Checklist:

1. Review business risks from your SWOT analysis. The weaknesses and threats are a list of risks. Begin with those that you marked as high.

2. Identify the business risks affecting your business plan.

o Determine your business’s tolerance for risk. Do you have a cash cushion? What level of uncertainty and risk can you tolerate?

o Consider the major risks you learned about in this lesson. Review your resources and readings for ideas.

3. Assess the likelihood and potential impact of each risk.

o Identify the most probable risks.

o Identify the most damaging risks.

4. Develop a strategy for mitigating (making less harmful), preventing, or resolving each risk.

o Which prevention methods will be most effective?

o What steps can you take to recover if a risk occurs?

o What are your risk management goals, and how will you measure them? (For example, goals may include setting financial goals, protecting property and funds, meeting legal requirements, meeting the needs of employees or customers, ensuring business continuity, and training employees.)

5. Write a risk assessment plan describing your risks and mitigation strategies.

o After planning your strategy in cooperation with your partner(s), write out an assessment plan in your own words.

o Your work should be two to four paragraphs long, in full sentences.

Make sure that your individual work meets or exceeds the following assessment criteria: The work clearly identifies and prioritizes key risks to the team’s unique business.

The work assesses the likelihood and potential impact of each risk.

The work demonstrates careful consideration of how to prevent risks and how to recover from risk events that occur.

The work describes team goals and the ways progress will be measured.

The work is neat and legible.


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