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Taking Risk Management to the Next Level

Taking Risk Management to the Next Level. Doug Jose North Central Risk Management Education Center June 14, 2011. Risk. Possible adverse event that has the potential to interfere with: A business entity’s financial stability Its ability to achieve its mission. Framework. Mission & Goals.

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Taking Risk Management to the Next Level

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  1. Taking Risk Management to the Next Level Doug JoseNorth Central Risk Management Education Center June 14, 2011

  2. Risk • Possible adverse event that has the potential to interfere with: • A business entity’s financial stability • Its ability to achieve its mission

  3. Framework Mission & Goals Relationships Business Growth Risk Strategic Planning Industry Forces

  4. Strategic Planning/Positioning • Strategy • Derived from “leader of an army” • Deception, ruse or intrigue • Strategic Planning • “A plan to overcome or deceive risk”

  5. Drucker defined strategic planning as: • The continuous process of making present entrepreneurial or risk-taking decisions with the greatest knowledge of their futurity. • Organizing the efforts to carry out those decisions. • Measuring the results through systematic feedback.

  6. Strategic Planning is not: • A box of tricks or bundle of techniques • Forecasting • Future decisions-it is the futurity of present decisions • An attempt to eliminate risk

  7. Tactical Planning • Tactical planning is short term. “What are we going to do today.”

  8. Success is… “Converting risks into opportunities”

  9. Model of Operating Environment Business Chain Producer/Transformer Consumer Good Raw Materials Industry Forces Economic Forces

  10. Defining Environment • Involves Visualizing: “Visualize or Fossilize”* *Steve Siemens, presentation to Nebraska Cooperative Extension Association, November, 2005

  11. Our Goal: 1. Move managers of people, assets and processes from… “managing for today to managing for tomorrow”

  12. Our Goal: 2.Challenge managers to become entrepreneurs to capture the opportunities “The entrepreneur always searches for the change, responds to it, and explains it as an opportunity.” - Peter Drecker

  13. Our Goal: 3.Help families balance their opportunities and risks

  14. Short-term - Today • Production issues for immediate attention • Market price quotes • Interest rate and operating margins • Debt level • Labor disruptions • Addressing a liability issue

  15. Long Term - Tomorrow • Production plan for effective use of resources • Growth goals and challenges • Marketing plan • Capital market • Management plan for daily operation and transition • Public policy debate

  16. Managers have risk exposures and opportunities • Risk Exposures • Input/output prices • Market power of suppliers and buyers • Domestic economy • Global economy • Income stability

  17. Managers have risk exposures and opportunities • Risk Exposures • Consumer fads • Management stability • Information integrity • Contracting arrangements • Relationships • Policies

  18. Managers have risk exposures and opportunities • Risk Exposures • Input/output prices • Market power of suppliers and buyers • Domestic economy • Global economy • Income stability • Opportunities • Productivity

  19. What opportunities do managers have? • Productivity Improvement Value per Input Value per Output Output per Input x = Source: J. Henderson, Presentation to National Risk Management Conference, March 2009.

  20. Managers have risk exposures and opportunities • Risk Exposures • Input/output prices • Market power of suppliers and buyers • Domestic economy • Global economy • Income stability • Opportunities • Productivity • Strategic planning • Wealth management • Global trade • Mission and goals

  21. Managers have risk exposures and opportunities • Risk Exposures • Consumer fads • Management stability • Information integrity • Contracting arrangements • Relationships • Policies • Opportunities • Consumer trends • Transition planning • Information technology • Alliances • Relationship building • Policies

  22. Operating Environment • Compression of Operating Margins • Interest Rate Increases • When will they increase and how fast • Energy Costs • Government Debt • Europe and U.S.

  23. Operating Environment • Entitlement Society • Increased food safety regulations • Animal welfare rules • Who bears the cost • Strategies of the 800 lb Gorillas • China, India, Japan, Russia, Brazil • Currency Rates

  24. Random Factors • Black Swans • Outlier, outside realm of expectations • Extreme impact • We theorize an explanation after the fact which infers it was predictable • Black Swan Strategy • Think broadly • Avoid extreme exposure

  25. Risk Management Tools – Production Risks • Seed Selection • Evaluate traits • Compare costs and risks • Breakeven analysis with risks factors • Caution with suppliers • Crop insurance

  26. Risk Management Tools – Marketing Risks • Future market tools • Understand the tool and the strategy • Seasonal trends • Still useful • Contractual arrangements • Understand conditions • Know contracting partner and their situation • Move from commodities to products

  27. Risk Management Tools – Financial Risks • Understand the Basics of Financial Analysis • Balance Sheet Analysis • Debt to Asset Ratio or Percent Debt Green: <35%Yellow: 35-65% Red: >65% • Balance Sheet Trends • Key: Change in Net Worth

  28. Risk Management Tools – Financial Risks • Understand the Basics of Financial Analysis 3. Current Ratio • Current asset/Current liabilities Green: < 2.0Yellow: 1.0-2.0 Red: < 1.0 • Working Capital • Current asset-Current liabilities • 30% of revenue

  29. Risk Management Tools – Financial Risks Understand the Basics of Financial Analysis • Plan the Use of Profit 60-30-10 Rule * • 60% Devote to increasing earned net worth • 30% Devote to building working capital • 10% Discretionary • Involve accountants and lenders • Budget a number of “what if” scenarios. *David Kohl, “Farm Management in the current financial situation”, Market Journal, marketjournal.unl.edu, October 10, 2008.

  30. Risk Management Tools – Human Risks • Transition plan • Communicate • Include transition of management and assets • Relationship Development and Maintenance • Family • Employees • Business contacts • Landowner – if renting land • Other farm business operators

  31. Risk Management Tools – Legal Risks • Understand environmental and zoning obligations and liabilities • Understand business liabilities

  32. Take Home Comments

  33. Economic Forces “The key talent in the future will be the ability to deal with the tremendous technological and cultural changes that are coming at an ever increasing pace.” John Mauldin “Frontline Weekly Newsletter” Nov. 27, 2008

  34. Economic Forces “Globalization is not just a manufacturing and sales process. It is also an intellectual process” John Mauldin “Frontline Weekly Newsletter” Nov. 27, 2008

  35. Risk Management Tools • Less effective/more expensive • Search and evaluate

  36. Capital Position • Who controls assets • Strong but vulnerable • Increase working capital

  37. Management Style • Entrepreneurial • Select employees and partners • Kohl’s 40-20-40 rule • Up to 40% of people you don’t need • 20% are marginal • 40% you want around you • “Board of Directors” • Peer group • Be a CEO of the Farm Business

  38. Au Revoir!

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