Introduction to Risk Management

Understanding Goals and Risk Tolerance

While no two people share the same goals in life, all of the people involved in a family business must share some common goals. Identifying those shared goals, involving everyone in the goal-setting process, and then acting together to achieve those goals should be a serious effort that focuses both the individual and the organization. After all, a family business cannot be successful if it does not help fulfill the individual dreams of everyone involved.

Many times, the hardest thing about setting risk management goals is reconciling different views about risk. People have different answers for the same fundamental questions....What are my risks? What are our risks? What is an acceptable level of risk? What should we do about the risks? Recognizing and acting on opportunities as well as trying to minimize losses can help shape agreement on fundamental risk management goals.

Benefits of Goal Setting
  • Reflects your values, interests, resources, and capabilities. An honest goal-setting session for yourself, your family, and your business will cause you to take inventory of those things.
  • Provides a basis for your decisions and a focal point for everyone involved. Well-understood organizational goals allow every individual in the organization to set realistic personal goals.
  • Establishes priorities for the allocation of scarce resources. What things will you do today and what things will you do in the future? For example, what priorities have you established for using net farm income? Buy land, pay for college, pay down debt?
  • Provides a means or measuring progress. Which decisions made progress toward your goals and which decisions need to be re-evaluated?
    • Some Questions for Your Risk Management Check-Up
    • Are my goals written, reasonable, and measurable?
    • Are my goals attainable in my lifetime?
    • Have I shared my goals with everyone involved in the business and have they shared their goals with me?
    What Is Your Risk Tolerance?

    Your risk tolerance is reflected in the ways you choose to manage risks. Understanding your choices and considering each of them may cause you to change your management style to more closely reflect your tolerance for risk.

    Risks can be handled in one of five ways, or in certain combinations of the five:

    1. Retain--With no protection from downside risk, as in holding an unpriced commodity.
    2. Shift--A contractural arrangement where someone else takes on some of the chance of a negative occurrence in exchange for a premium. The more risk you shift, the higher the cost.
    3. Reduce--Keeping fences in good repair to keep livestock off the highway and a marketing plan that locks in some level of guaranteed return are examples of reducing risk.
    4. Self-insure--Emergency reserves funded from previous years" profits.
    5. Avoid--Not selecting a particular enterprise...not pushing either end of planting windows...not increasing your debt-to-asset ratio beyond you comfort level.

    Any risk must be evaluated for its frequency of occurrence and its possible negative consequences. As a general rule, formal insurance strategies are available for risks with low occurrences but with severe negative consequences. As a general rule, formal insurance strategies are available for risks with low occurrences but with severe negative consequences. Examples include disability insurance, health insurance, crop insurance, and life insurance.

    Benefits of Identifying Your Risk Tolerance and Assessing Your Risks
    • Allow you to identify and exclude those alternatives that expose you to unacceptable risks.
    • Help guide providers of risk management services to the best options for you.
    • Ensure that your insurance dollars will be spent wisely.
    • Increase the likelihood that you will select the best combination of risk management strategies.
    Some Questions for Your Risk Management Check-Up
    • Have I identified my risk tolerance?
    • Have I communicated my tolerance for risk to the professionals who provide me with risk management services?
    • Which risks can keep me from attaining my goals?
    • Which risks am I comfortable retaining and managing with my own resources? Which risks will I shift to others? Which will I avoid?
    • When was my last insurance check-up for health, life casualty, property, disability, long-term care, Medicare/Medicaid, and crop insurance?
    • Have I established a confident relationship with my risk management advisers so that they can help me assess my business and personal risk exposure?


     It's a Whole New Ball Game
    Understanding Goals and Risk Tolerance
    Understanding Production Risks
    Understanding Marketing Risks
    Understanding Financial Risks
    Legal Issues Associated With Agriculture
    Human Resources Issues

    		   
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