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CASE 18-2: Costs versus Risk Xavier and Olivia Sanchez are making final plans to open the small antiques 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 local 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 operating 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 advertising 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 insurance 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 insurance 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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