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Overview of Risk Management. Unit 4: Agribusiness Management Lesson: AM8. Objectives. Lesson Objective:
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Overview of Risk Management Unit 4: Agribusiness Management Lesson: AM8
Objectives Lesson Objective: • After completing the lesson on an overview of risk management, students will demonstrate their ability to apply the concept in real-world situations by obtaining a minimum score of 80% on a Risk Management Survey. Enabling Objectives: • Use a risk management assessment tool in examining a personal decision. • Examine a business’s current issue or dilemma and use the Risk Management Model to develop a solution to lower the risk. • Indicate five ways agribusinesses can reduce risk.
Key Terms • Risk Management
Risk Management • Identification, assessment, and prioritization of both positive and negative risk • Risks come from uncertainty in financial markets, legal liabilities, production, project failures, credit risk, natural disaster, policy, human resource issues, and reputation risk
Risk Response Action Plan • Each major risk (high or medium) should be assigned to an assigned party of monitoring and controlling purposes • Approaches for addressing major risk • Avoid • “High impact probability” • Avoid if cause cannot be eliminated or mitigated • Mitigate • Medium to high categories • Identify ways to reduce probability of impact • Accept • Do nothing • Management willing to accept risk • Contingency • Require action plan to address risk • Transfer • Shift risk to third; Insurance policies, outsourcing processes, etc.
Risk Management Assessment • As with any business planning assessment process, the risk management process is a key tool used in successful businesses and is an ongoing process of identifying and managing risk.
Production • Risks associated with components related to production • Technology • Natural Disasters • Production Quality • Contractual • Equipment Obsolesce or Inefficiencies • Counterparty Risk • Scope of Production
Market • Risks associated with market relationships of a business • Price • Supply and Demand • Counterparty • Production Quality • Value of the Dollar
Financial • Risk associated with financial relationships of a business • Capital • Is capital adequate to sustain ongoing business operations? Does capital meet lender financial requirements for borrowing needs? • Does the operation have sufficient capital to maintain business operations, replacement or support expansion plans? • Availability of Capital • Are reliable sources available? Are borrowed funds structured to meet the business capital and operating needs? Are repayment terms for borrowed capital matched to the business cash flow? • Quality of Financials • Are financials Fiscal or Calendar Year and is accountant prepared or internal? Market or cost basis statements? Are financial and earnings statements of sufficient quality and adequacy to meet business and lender needs? Cash or accrual earnings statement? • Sustainable Growth and Debt Levels • Are current or proposed business growth and debt expansion plans sustainable? • Counter Party • Measures risk exposure and concentration of business relationships in the event of failure of another business which could result in loss or partial loss of business assets or impairment of capital resources • Supplies, elevators or other buyers of products, goods or services, deferred payments, etc., lenders, accounts receivable
Legal • Business Structure • Taxes • Deferred taxes, estate taxes, franchise, earnings, and others • Contractual Arrangements • Issues arising from simple cash rent agreement, purchase agreement, promissory notes, real estate contracts, production contracts, etc. • Tort Liability • Statutory Compliance • Environmental
Human Resources • Labor • Resource allocation and labor management • Employees • Training, benefits, retirement, etc. • Divorce • Impact on business owners • Death • Succession planning • Disagreements • Labor, business owners, etc.
Environmental • Discharges • CAFO’s • Hazardous Materials • Fuel, chemical, fertilizer, and other materials • Airborne • Nuisance • Contamination • GMO, processing, etc.
Policy • Risk associated with government programs, policy, or procedures • Government Payments or Subsidies • Direct payments, Sure, cotton, peanuts, Biofuel, and others • Monetary Policy • Impact of US treasury on interest rates, value of dollar, and relationship on exports
Reputation • Strength of a business is no greater than its weakest link • Whether issues arise through production, processes, marketing, price or customer service, with each customer touch, the “business reputation” is at risk • Can greatly be affected by social media • Production Quality • Customer Service • Competitive Pricing • External Image or Branding • External and Internal Communications • Employee Knowledge of Products and Services • Human Resources
Black Swan Events • Events which meet the following criteria: • 1) An event of surprise or rare event • 2) Carries extreme impact • 3) Events which are not predictable but in retrospect, determined the event(s) could have been anticipated • Acts of Terrorism (9-11-01) • Stock Market Crash (1987) • Financial Collapse of 2008
Risk Management Model • Risk Management Model can be used across multiple business segments when assessing risk. • Not all components of the model may apply to each situation, yet some components can be found in multiple segments. • As with any business planning model, the Risk Management Model can be used at anytime during the business cycle to assist in identifying risk areas for the Risk Management and Planning assessment model.
Conclusion • Risk management is an important aspect of any business. If the owner or manager of an agricultural business does not manage risk, the life of the business may be short. • Following a risk management model can help business owners identify, assess, and prioritize risk. • There are several methods for reducing risk such as insurance, diversification, price protection strategies, production contracting, and rental or leasing agreements.
Exit Card • What did you learn today about risk management? • What questions do you still have about risk management?