introduction to risk management one way to look at risk is “the chance that an event will turn out...
TRANSCRIPT
Introduction to Risk Management
• One way to look at risk is “the chance that an event will turn out in a way that makes you worse off”
• In this lesson, you will learn:– The differences between risk and
uncertainty
– How to establish goals
– How attitudes affect your willingness to accept risks
Introduction to Risk Management
• Risk management requires you to:– Recognize your risk attitude
– Assess your risk-bearing ability.
– Develop a risk management plan to manage identified risks
Introduction to Risk Management: Optimism and Pessimism
• Another way to look at risk is as “the possibility that something unpleasant or unwelcome will happen”
• Optimists view the world as having low risk
• Pessimists view the world as having higher risk
Introduction to Risk Management: Risk and Uncertainty
• So what is the difference between risk and uncertainty?
• Risk– The probabilities of outcome are
known
– “Even though there’s a chance of snow tomorrow, I’m going to put on snow tires next week”
• Uncertainty– The probabilities of outcome are
unknown
– “I wonder what the weather will be like tomorrow”
Introduction to Risk Management: Defining Risk Management
• Risk management can be defined as: “Managing resources to maintain acceptable levels of risk”
• Every day, we practice risk management in our personal lives as well as in our business lives
Introduction to Risk Management: Handling Risk
• There are tradeoffs that affect how we handle goals and risks that matter, such as: – Changes in risk levels
– Changes in our expected return
– Our desire to retain entrepreneurial freedom
Introduction to Risk Management: Setting Goals
• Where are you going in business?
• What do you want to achieve?
• What are your goals?
• Be specific about where you’re going - choose your goals, make a map or plan and follow through on that path– Which road are YOU choosing?
Introduction to Risk Management: Setting Goals– Being Specific
• Before you begin:– Know where you are going
– Identify and specify your goals
• Setting goals helps you manage risk
Introduction to Risk Management: What are Goals?
• Goals are your personal statements that reflect:– Your values and beliefs
– The resources available to you
– The limitations or obstacles you face
• Involve your family members or business principals in goal discussions
Introduction to Risk Management: Determine Goals
• Keys to successful business goal development:– Negotiation
– Compromise
• Understanding your goals can help you to decide what risks you are willing to accept
• Note: You will find additions tools for goal setting in the Strategic Planning and Goal Setting Lesson
Introduction to Risk Management: Determine Risk-Bearing Ability
• Risk bearing ability is your ability to accept risk without affecting the long term survival of your business
• Balance sheet financial measures include:– Liquidity
– Solvency
– Profitability
– Repayment capacity
– Financial efficiency
Introduction to Risk Management: Risk-bearing Ability – Liquidity
• Think of liquidity as:– The ability to meet financial obligations
as they become due
– A short-run concept of on-time payment of bills
Introduction to Risk Management: Risk-bearing Ability: Solvency
• Think of solvency as:– The ability to repay all financial
obligations
– A long-run concept of who has a greater capital interest in your business
Introduction to Risk Management: What is Your Risk Attitude?
• Different people have different risk attitudes
• Are you comfortable with:
HIGH RISK?
MEDIUM RISK?
LOW RISK?
• Life brings new opportunities and new challenges that often cause risk attitudes to change over time
Introduction to Risk Management: Discussion
Introduction to Risk Management: Improved Understanding of your Risk Attitude
• Improved understanding of your “risk attitude” helps you:– Analyze your business alternatives
more effectively
– Make wise day-to-day decisions
Introduction to Risk Management: Risk Attitudes– Individual Characteristics
• Do you consider yourself as someone who is:– Risk averse?
– Risk preferring?
– Risk neutral?
Introduction to Risk Management: Risk Averse and Risk Preferring
• If you are risk averse, you probably tend to avoid risky ventures and activities
• In order to reduce the possibility of loss, you don’t mind giving up some return and have a lower risk-bearing ability
• If you are risk preferring, you have a greater risk-bearing ability and often find your self excepting more risk then others
Introduction to Risk Management: Risk Neutral
• If you are risk neutral, you tend to play the middle of the road and prefer a moderate risk position knowing that you might not get the highest rate of return
Introduction to Risk Management: The Next Step– Developing a Business Plan
• The next step is putting together a good business plan- the “blueprint” for your success, as you define it
• To maximize your success, use your business plan:– As the basis for all resource allocation
decisions
Introduction to Risk Management: Summary
• To be a successful agricultural producer, think of yourself as a business person first and a farm or ranch operator second
• Risk management is the key to building a successful business
• Setting goals and knowing your risk attitude sets the groundwork for a successful agricultural production
• Remember, “if you don’t know where you are going, any road will get you there”