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Managing for the Millennium

Managing for the Millennium. Managing Risk in Risky Times. Defining Risk. The uncertainty about an outcome and the possibility of an undesirable outcome from an expected goal. Sources of Risk. Production Marketing Financial Legal Human Resources. Production Risk. Weather

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Managing for the Millennium

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  1. Managing for the Millennium Managing Risk in Risky Times

  2. Defining Risk The uncertainty about an outcome and the possibility of an undesirable outcome from an expected goal

  3. Sources of Risk • Production • Marketing • Financial • Legal • Human Resources

  4. Production Risk • Weather • Diseases • Pests • Technology • Management

  5. Marketing Risk • Input cost variability • Output price variability • Price volatility • Market access

  6. Financial Risk • Access to capital • Interest rate risk • Credit obligations • Asset control

  7. Legal Risk • Production, marketing, and leasing contracts • Business and personal liability • Business and environmental regulations

  8. Human Resources Risk • Hired labor • Death and disability • Divorce • Business continuity • Time

  9. 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

  10. Defining Risk Management Every- thing you do that can impact your bottom line and your long-term growth in net worth

  11. Steps of Risk Management • Identification • Evaluation • Treatment • Implementation • Monitoring

  12. Identification • Goal setting • Risk tolerance • Sources of risk

  13. Income 10 9 8 7 6 5 4 3 2 1 Professional Liability Investment 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 Personal Liability Retirement Planning 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 Long Term Health Care Disability Health Insurance Life Insurance Estate Planning Identification

  14. Evaluation • Frequency • Severity

  15. High frequency Low severity High frequency High severity Low frequency Low severity Low frequency High severity Evaluation

  16. Treatment • Reduce • Transfer • Avoid • Retain • Self-insure

  17. Treatment High frequency Low severity AVOID/REDUCE/ RETAIN High frequency High severity AVOID/ TRANSFER AVOID/REDUCE/ RETAIN Low frequency Low severity REDUCE/RETAIN/ TRANSFER Low frequency High severity

  18. Implementation • Selection • Team approach

  19. Production Enterprise choice Technology Yield insurance Revenue insurance Contract production Management Marketing Marketing plan Futures contracts Options contracts Cash contracts Revenue insurance Contract production Implementation

  20. 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 Implementation

  21. Monitoring • Performance • Balance • Changing conditions • Advisory group

  22. Income 10 9 8 7 6 5 4 3 2 1 Professional Liability Investment 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 Personal Liability Retirement Planning 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 Long Term Health Care Disability Health Insurance Life Insurance Estate Planning Monitoring

  23. Benefits of Risk Management • Risk management increases the value of the business • Businesses with an appropriate risk management plan are positioned for future growth

  24. Summary • Review your business plan • goals • risk tolerance • risk exposure • Understand risk management methods, tools, and interactions • Build your risk management team

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