ESB Risk Management 1 — Questions and Answers
Question 1: Which of the following best describes 'risk management' in the context of a small business?
- Eliminating all possible uncertainties before launching
- Identifying, assessing, and prioritizing potential threats and taking actions to minimize their impact (Correct answer)
- Transferring all financial liability to investors
- Avoiding any business activity that carries uncertainty
Correct answer: Identifying, assessing, and prioritizing potential threats and taking actions to minimize their impact
Risk management involves identifying, assessing, and prioritizing risks, then implementing strategies to minimize or control their impact on the business.
Question 2: A small business owner purchases liability insurance to protect against lawsuits from customers. This is an example of which risk management strategy?
- Risk avoidance
- Risk retention
- Risk transfer (Correct answer)
- Risk reduction
Correct answer: Risk transfer
Purchasing insurance is a classic example of risk transfer, where the financial burden of a potential loss is shifted to an insurance company.
Question 3: What is 'pure risk' in a small business context?
- A risk that can result in either profit or loss
- A risk that can only result in loss or no loss, with no possibility of gain (Correct answer)
- A risk taken intentionally for potential reward
- A risk associated exclusively with market speculation
Correct answer: A risk that can only result in loss or no loss, with no possibility of gain
Pure risk only has two outcomes — loss or no loss — with no possibility of financial gain, such as fire damage or theft.
Question 4: An entrepreneur decides not to enter a highly litigious market segment to avoid potential lawsuits. This is an example of which risk strategy?
- Risk transfer
- Risk retention
- Risk avoidance (Correct answer)
- Risk reduction
Correct answer: Risk avoidance
Risk avoidance means choosing not to participate in an activity that carries significant risk, eliminating the exposure entirely.
Question 5: Which document helps a small business identify critical operations and plan for continued functioning during a disaster?
- Cash flow statement
- Business continuity plan (Correct answer)
- Balance sheet
- Marketing plan
Correct answer: Business continuity plan
A business continuity plan outlines how critical operations will continue during and after a disruptive event, minimizing downtime.
Question 6: A startup keeps a cash reserve equal to three months of operating expenses to handle unexpected downturns. This illustrates which risk management approach?
- Risk avoidance
- Risk retention (Correct answer)
- Risk transfer
- Risk exploitation
Correct answer: Risk retention
Risk retention means the business accepts and self-funds a potential loss, often by setting aside reserves to cover it.
Question 7: Which type of business risk arises from changes in laws, regulations, or government policies that affect operations?
- Operational risk
- Regulatory/compliance risk (Correct answer)
- Reputational risk
- Credit risk
Correct answer: Regulatory/compliance risk
Regulatory or compliance risk is the threat of loss resulting from failure to comply with laws, regulations, or industry standards.
ESB Risk Management 1
Which of the following best describes 'risk management' in the context of a small business?