BUSINESS RISKS defined in two ways.

Viewed as the variability in possible outcomes of an event based on chance

Uncertainty associated with an exposure to loss
May be classified by the two major risks:
INTERNAL arising from the events taking place within the organization
EXTERNAL arising from the events taking place outside the organization
FIVE MAIN TYPES
1. Strategic Risks associated with the operations of that particular industry. These
arises from
a. Business Environment: buyers and sellers interacting to buy and sell goods
and services, changes in supply and demand, competitive structures and
introduction of new technologies.
b. Transaction: assets relocation of mergers and acquisitions, spin-offs, alliances
and joint ventures
c. Investor Relations: strategy for communicating with individuals who have
invested in the business.
2. Financial Risks associated with the financial structure and transactions of the
particular industry.
3. Operational Risks associated with the operational and administrative procedures of
the particular industry which are very common in todays generation.
4. Compliance/Legal Risks associated with the need to comply with the rules and
regulations of the government.
5. OTHER natural disasters, and etc. depend upon the nature and scale of the industry
Methods of Handling Risk
Risk may be avoided Loss may be reduced
Risk may be retained Risk may be shifted
Hazard may be reduced Risk may be reduced
INSURANCE AS A DEVICE FOR HANDLING RISK
Insurance contract whereby one undertakes, for a consideration, to indemnify another
against loss, damage or liability arising from an unknown/contingent risk.
Insurance Policy written instrument in which a contract of insurance is set forth,
and it must specify the following
o parties between whom the contract is made
o amount to be insured except in the cases of open or running policies
 o premium, or if the insurance is of a character where the exact premium is only
determinable upon the termination of the contract, a statement of the basis
and rates upon which the final premium is to be determined
o property or life insured
o interest of the insured in property insured, if he is not the absolute owner
thereof
o The risks insured against
o The period during which the insurance is to continue
Insurable Interest is a stake in the value of an entity or event for which
an insurance policy is purchased to mitigate risk of loss. It is a basic requirement for
the issuance of an insurance policy, making it legal and valid and protecting against
intentionally harmful acts.
Types of Insurance Coverage
1. Life insurance - agreement between the policyholder and the insurer, where the
insurer for a consideration of a sum of money agrees to reimburse / compensate upon
the policyholders death or any other event, such as terminal illness, critical illness or
maturity of the policy.
a. Term Life insurance - pays only if death of policyholder occurs during the term of
the policy. Most term policies have no other benefit provisions.
Straight written for a specific number of years and then automatically
terminated
Long-term written to terminate at some specified age of the insured,
commonly 65.
Renewable may be renewed by the insured before expiry date, without
again proving insurability
Convertible may be converted into whole life or endowment insurance
within specified period, without evidence of insurability
Increasing the policy amount of which increase monthly or yearly
Decreasing the face value of which reduces periodically, either monthly
or yearly

b. Whole life/Permanent life insurance provides long life protection and will
remain in force for as long as you continue to pay your premiums.
Single-Premium in exchange for one premium, the insurer promises to
pay the claim whenever death occurs.
Continuous-Premium the insured pays the same premium amount
continuously as long as he is alive
Limited-Payment the premiums are paid for limited period of years, after
which no further premium payments need to be made
 2. Non-life insurance/General insurance - typically defined as any insurance that is not
determined to be life insurance
a. Motor Insurance/Auto Insurance
b. Health Insurance - includes, individual health insurance, family floater health
insurance, comprehensive health insurance and critical illness insurance.
c. Travel Insurance: can be broadly grouped into Individual travel policy, Family
Travel policy, student travel insurance and senior citizen health insurance.
d. Home / Fire Insurance - protects house and its contents in bad time.
e. Marine Insurance: Marine cargo insurance covers goods, freight, cargo and
other interests against loss or damage during transit by rail, road, sea and/or
air.
f. Commercial Insurance - encompasses solutions for all sectors of the industry
arising out of business operations
3. Endowment Insurance the insurer promises to pay the beneficiary a stated sum if
the insured dies during the policy term (endowment period) or to the insured if the
policy term is survived.
a. term for which they are written may vary from 5-40 years
b. designed age of maturity to which they are written, such as 60-65 years
c. period of premium payment, such as limited payment endowment is payable at
death or at the end of endowment period
4. Annuities series of payments made at certain specified intervals. Written either (1)
as separate contracts, on an individual/group basis; or (2) as supplementary
contracts, using the proceeds of a life insurance contract to purchase an annuity
benefit.
BUSINESS FAILURE refers to the following:
all industrial and commercial enterprise that are petitioned for bankruptcy in the
courts
concerns which are forced out of business through such actions in the courts as
foreclosure, execution, and attachments with insufficient assets to cover all claims
concerns involved in actions in courts and other government agencies such as
receivership, reorganization or arrangement
voluntary discontinuance with known loss to creditors
voluntary compromises with creditor out of court
CLASSES OF FAILURES
1. Economic Failure happens when the firms revenues no longer cover costs.
2. Financial Failure happens when the firm becomes insolvent or unable to pay its
debts.
CAUSES OF FAILURE
A. EXTERNAL
o Recession
o Changes in government regulations or contracts
o Burdensome taxes or tariffs
o Court decisions
o Legislation unfavorable to the specific type of business or to business in
general
o Strikes or boycotts
o Labor cost
o Dishonest employees
o Disasters
B. INTERNAL
o Overcapitalization in debt
o Undercapitalization in equity
o Inefficient management of income
o Inferior merchandise
o Improver costing with excessive expenditures
o Errors of judgment concerning problems or expansion
o Inefficient pricing decisions
o Inability to improve a weak competitive position
SYMPTOMS OF FAILURE
Statistical data are sometimes useful in identifying indications of impending business
failure. In this regard financial rations play an important role.
Cash Flow to Total Debt viable firms have higher cash flow to total ratio. When this
ration gets lower, the financial standing of the firm weakens, and when it gets even lower,
failure approaches.
Market Price approaching failure is also indicated by a declining market price of the
firms stock. This is the result of the decreasing confidence of the investors in the survival
of the firm.
Working Capital to Total Assets when this ratio declines, failure approaches. The decline
reflects the inadequacy of working capital.
Retained Earnings to Total Assets retained earnings provide a source of funding for
unexpected costs, delays, or credit crunches. A decline in this ratio indicates an
approaching failure.
Earnings before Interest and Taxes to Total Assets the ration reflects the adequacy of
cash flow in relation to the firms liabilities. A lower ratio means lesser chance of settling
debts.
 Market Value of Equity to Book Value of Debt when debts are used excessively, the
market value of the stock goes down because of increased financial risk. This is indicated
by lowering down of the ratio.
Sales to Total Assets a decreasing sales to total assets ratio reflects a shrinking market
for the product. As the ratio gets lower, the firm approaches failure.
REMEDIAL ACTIONS FOR BUSINESS FAILURES
Rehabilitation an attempt to keep the firm going. It may be achieved through any
of the following:
1. Formal proceeding called reorganization
2. Voluntary agreement
Reorganization refers to a formal proceeding under the supervision of a court,
including short term liabilities, long term debt and stockholders equity, in order to
correct gradually the firms immediate inability to meet its current payments. It may
call for:
a. Refinancing replacement of outstanding securities by the sale of new securities.
May be classified as refunding, funding or/and reverse funding.
b. Recapitalization undertaken when a group of existing security holders accepts a
new issue in voluntary exchange for the issue it now holds.
Voluntary Agreement when creditors and stockholders agree to give the firm a
chance to get back on the right track under a mutually accepted plan. It may fall under
extension, composition or/and creditor management.
LIQUIDATION occurs when a firm dissolves and ceases to exist and its assets are solid. It
may be accomplished through any of the following:
a. A voluntary agreement called assignment
b. A formal proceeding called liquidation under bankruptcy
Assignment an out of court settlement where the creditors select a trustee to sell
the asset and distribute the proceeds.
Liquidation under Bankruptcy legal process by which a person or business that is
unable to meet financial obligations is relieved of those debts by the court. The court
divides whatever is left of the assets of the person or firm among creditors, allowing
creditors at least part of their money and freeing the debtor to begin anew.
QUIZ QUESTIONS & ANSWERS

I. Identification
Strategic Risks 1. It is one of the main type of business risk that associated with the
operations of that particular industry
Insurable Interest 2. It is a stake in the value of an entity or event for which an insurance
policy is purchased to mitigate risk of loss.
Operational Risks 3. It is associated with the operational and administrative procedures of
the particular industry which are very common in todays generation.
Life Insurance 4. An agreement between the policyholder and the insurer.
Financial Risks 5. It is associated with the financial structure and transactions of the
particular industry.

II. Matching Type

C 1. Happens when the firm's revenue no A. Rehabilitation
longer cover cost.
B. Refinancing
A 2. A/an attempt to keep the firm going.
C. Economic Failure
D 3. Occurs when firm dissolves and ceases
D. Liquidation
to exist.
E. Recapitalization
B 4. Replacement of outstanding securities
by new securities. F. Reorganization
G 5. Trustee sell the asset and distribute G. Assignment
the proceeds.
H. Liquidation under bankruptcy
 REFERENCES
Jover F. M. (2015, September 9). Business Risks, Failures, Reorganization and Liquidation. Retrieved
from www.slideshare.net/denisenylef/business-risksfailuresreorganizationandliquidation

Torcino, D. (2014, October 10). Chapter 16: Business Failure, Reorganization and Liquidation.
Retrieved from prezi.com/nj_cfoptusa3/copy-of-chapter-16-business-failure-reorganization-and-
liquidatio/

Guerard, J. B. Jr. (2007). Liquidation, Failure, Bankruptcy and Reorganization. Retrieved from
link.springer.com/chapter/10.1007/978-0-387-34465-2_19

GROUP VI
Navarro, Kaycee Leader
Suela, Roselle
Dayaon, Eliseo Jr.
Loyola, Bea, Lorraine
Bonaobra, Eunneece
Garcia, Ma. Gizela
Balcorta, Julia
Real, Dyan
Cao, Roy