Page 518 - Business Principles and Management

C HAPTER 18 A SSESSMENT

CASE 18-2: Costs versus Risk
Xavier and Olivia Sanchez are making final plans to open the small an-
tiques shop they have been planning for several years. They have bought
and sold antiques as a hobby for many years. They would purchase one
or two pieces, clean and repair them as needed, then display them at lo-
cal flea markets and crafts fairs. They have many customers who know
them very well and who regularly call them for help in locating specific
pieces they are looking for. They are viewed by many as real experts in
the antiques business.
In the beginning, buying and selling antiques was just a hobby the
Sanchezes enjoyed. Gradually they decided to turn their hobby into a
full-time business. They have taken several steps to realize their dream.
They rented an older store building in the downtown area, spent the last
six months going to auctions and making some very good purchases, and
worked with their banker to develop a business plan for their shop. With
the help of the SBA, they obtained a six-month loan to pay the initial
costs they cannot cover from their personal savings.
Now they are ready to open the business. They have little money left
other than the money they have put aside for their living expenses until
the business starts to make a profit. All the money they borrowed is tied
up in inventory, display equipment, advertising, and a reserve for operat-
ing expenses, including the first six months of rent. They are running the
shop themselves so will have no employee expenses. They are confident
they can get by on the money they have saved. They expect that advertis-
ing will bring many customers into the store.
As they review their budget and bank account balances one last time,
Olivia reminds Xavier that they have not purchased any business insur-
ance as their banker recommended. She is worried that they face several
risks that could result in serious financial problems for them and their
business. However, Xavier believes that because the money from their
loan is already committed and the money in their personal savings is very
limited, they will have to do without insurance until the business starts
making a profit. “After all,” he reasons, “we’re renting the building, so
we don’t need fire insurance. If there is a fire, the landlord’s policy will
cover us. And we don’t have any employees, so we don’t need health or
life insurance. Why should we waste money right now on unnecessary
insurance?”

THINK CRITICALLY
1. Do you agree that if the owner of the building has a fire insurance
policy, the Sanchezes will not need to purchase their own fire insur-
ance for their antiques? Why or why not?
2. What types of insurable risks in addition to those identified by
Xavier should the Sanchezes consider when deciding whether to
purchase insurance?
3. What noninsurable risks might the Sanchezes face? What do you
recommend they do to reduce the impact of those risks?

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