risk management education managing for the millennium managing risk in risky times
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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
ent
Plan
nin
gL
on
g T
ermH
ealth C
are
Life
Insurance
EstatePlanningHealth
Insurance
Dis
abili
tyP
erso
nal
Lia
bili
tyPro
fessional
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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IncomeInvestment
Retirem
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Plan
nin
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g T
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ealth C
are
Life
Insurance
EstatePlanningHealth
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Dis
abili
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fessional
Liability
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