Risk Management Education Managing for the Millennium Managing Risk in Risky Times

Risk ManagementEducation

Managing for Managing for the Millenniumthe MillenniumManaging Risk in Risky Times

Risk ManagementEducation

The uncertaintyabout anoutcome andthe possibilityof anundesirableoutcome froman expectedgoal

Defining Risk

Risk ManagementEducation

Sources of Risk

• Production

• Marketing

• Financial

• Legal

• Human Resources

Risk ManagementEducation

Production Risk

• Weather

• Diseases

• Pests

• Technology

• Management

Risk ManagementEducation

Marketing Risk

• Input cost variability

• Output price variability

• Price volatility

• Market access

Risk ManagementEducation

Financial Risk

• Access to capital

• Interest rate risk

• Credit obligations

• Asset control

Risk ManagementEducation

Legal Risk

• Production, marketing, and leasing contracts

• Business and personal liability

• Business and environmental regulations

Risk ManagementEducation Human Resources

Risk• Hired labor

• Death and disability

• Divorce

• Business continuity

• Time

Risk ManagementEducation Rankings of Risk

Exposure• Output price variability

• Yield variability

• Operator injury, illness, or death

• Changes in government programs

• Changes in environmental regulations

• Costs of inputs

Patrick and Ullerich, 1996, Purdue University

Risk ManagementEducation

Defining RiskManagement

Every-thing you do thatcan impact yourbottom line andyour long-termgrowth in networth

Risk ManagementEducation Steps of Risk

Management• Identification

• Evaluation

• Treatment

• Implementation

• Monitoring

Risk ManagementEducation

Identification

• Goal setting

• Risk tolerance

• Sources of risk

Risk ManagementEducation Identification

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IncomeInvestment

Retirem

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Plan

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Life

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Liability

Risk ManagementEducation

Evaluation

• Frequency

• Severity

Risk ManagementEducation

Evaluation

High frequencyLow severity

Low frequencyLow severity

High frequencyHigh severity

Low frequencyHigh severity

Risk ManagementEducation

Treatment

• Reduce

• Transfer

• Avoid

• Retain

• Self-insure

Risk ManagementEducation

TreatmentHigh frequencyLow severityAVOID/REDUCE/RETAIN

High frequencyHigh severityAVOID/TRANSFER

AVOID/REDUCE/RETAINLow frequencyLow severity

REDUCE/RETAIN/TRANSFERLow frequencyHigh severity

Risk ManagementEducation

Implementation

• Selection

• Team approach

Risk ManagementEducation

Implementation

• Production Enterprise choice Technology Yield insurance Revenue

insurance Contract

production Management

• Marketing Marketing plan Futures contracts Options contracts Cash contracts Revenue

insurance Contract

production

Risk ManagementEducation

Implementation• Financial

Recordkeeping and analysis

Interest rate hedging

Insurance Family living costs Transition and

estate planning

• Legal Contracting Insurance Management

• Human Resources Planning Transition and

estate planning Management

Risk ManagementEducation

Monitoring

• Performance

• Balance

• Changing conditions

• Advisory group

Risk ManagementEducation Monitoring

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Risk ManagementEducation Benefits of Risk

Management• Risk management increases the

value of the business

• Businesses with an appropriate risk management plan are positioned for future growth

Risk ManagementEducation

Summary

• Review your business plan goals risk tolerance risk exposure

• Understand risk management methods, tools, and interactions

• Build your risk management team