What is risk & risk mgt. Why do we need risk analysis Who uses risk management How is risk management used? The 7 basic process steps… Component of risk Overall categories of risk 5 primary means of risk mgt. How? etc.....

1. and Adrian Pegason & Atty. Darwin Tenaja Dec. 2010 College of Governance, Business & Economics Department of Business Administration FINANCIAL MANAGEMENT Prof. R. Gabuya

2. overview What is risk & risk mgt. Why do we need risk analysis Who uses risk management How is risk management used? The 7 basic process steps… Component of risk Overall categories of risk 5 primary means of risk mgt. How?

4. What is Risk and Risk Management

5. What is Risk Risk exists if there is something you don’t want to happen – having a chance to happen!!!

6. What is Risk – Take 2 The probability that some event will cause an undesirable outcome on the financial health of your business and/or other business/family goals risk = probability of event x cost of event

7. - Single point forecasts are dangerous! - Derive bounds for the range of possible outcomes - Sensitivity testing of the assumptions - Better perception of risks and their interaction - Anticipation and contingency planning - Overall reduction of risk exposure through hedging Why do we need risk analysis Risk analysis helps you develop insights, knowledge and confidence for better decision making and risk management .

10. Effective Risk Management is a recognised and valued skill. Educational institutions have formal study courses and award degrees in Risk Management. The Risk Management process is well established. (International RM process standards.) Who uses Risk Management? Risk Management is now an integral part of business planning.

11. How is Risk Management used? The Risk Management process steps are a generic guide for any organisation, regardless of the type of business, activity or function. There are 7 steps in the RM process

12. The basic process steps are: Establish the context Identify the risks Analyse the risks Evaluate the risks Treat the risks

13. ‘ Risk’ is dynamic and subject to constant change, so the process includes continuing : Communication & consultation Monitoring and review and

14. The Risk Management process: The strategic and organisational context in which risk management will take place. For example, the nature of your business, the risks inherent in your business and your priorities. Communicate & consult Establish the context

16. The Risk Management process: Communicate & consult Monitor and review Analyse the risks How likely is the risk event to happen? (Probability and frequency?) What would be the impact, cost or consequences of that event occurring? (Economic, political, social?)

17. The Risk Management process: Communicate & consult Monitor and review Evaluate the risks Rank the risks according to management priorities, by risk category and rated by likelihood and possible cost or consequence. Determine inherent levels of risk.

19. The Risk Management process: Document your risk management plan and describe the reasons behind selecting the risk and for the treatment chosen. Record allocated responsibilities, monitoring or evaluation processes, and assumptions on residual risk. Communicate & consult Monitor and review Treat the risks

20. The Risk Management process: Communicate & consult Risk Management policies and decisions must be regularly reviewed. Monitor and review In identifying, prioritising and treating risks, organisations make assumptions and decisions based on situations that are subject to change, (e.g., the business environment, trading patterns, or government policies).

21. The Risk Management process: Communicate & consult Risk Management policies and decisions must be regularly reviewed. Monitor and review In identifying, prioritising and treating risks, organisations make assumptions and decisions based on situations that are subject to change, (e.g., the business environment, trading patterns, or government policies).

22. Monitoring and review Communication & consultation Establish the context Identify the risks Analyse the risks Evaluate the risks Treat the risks

23. Components of Risk Probability of 5% Probability of 15% Probability of 60% Probability of 15% Probability of 5% EVENT Cause/Source Hail Odor lawsuit e.g. fpic. Disabling farm accident Surplus Production Increasing interest rates Potential Outcome #1 Potential Outcome #2 Potential Outcome #3 Potential Outcome #4 Potential Outcome #5 [minor nuisance] [catastrophic]

26. Overall Categories of Risk 11 Family Goals & Objectives Legal Risk Price Risk Environmental Risk 5 D’s Risk - Death - Disability - Disagreement - Divorce - Disaster Production Risk Human Resources Risk Financial Risk Relationship/Public Relations Risk

27. Risk Increases the More You Don’t Know All The Potential Outcomes The Probability of Occurrence Cost of a Undesirable Outcome

28. All The Potential Outcomes The Probability of Each Outcome Occurring Cost of Undesirable Outcomes Said Another Way : The more you do know and understand about the better long term risk manager you will be.

29. What is Risk Management? Assuring An Outcome

31. Level of Production Employee Performance Interest Rates Personal Injury/Death (you, employee, spouse) Divorce Disagreement 19

32. Production Risk Risk : Poor weather event causing the undesirable outcome of lower than expected yields. Risk Management??? 160 195 95 Corn Yields Transfer the cost of the risk via crop insurance

33. Production Risk : Risk : of a poor weather event causing the undesirable outcome of lower than expected yields Risk Management??? 160 195 95 Corn Yields Reduce the cost of the risk via spatial location, multiple variety selection, and other cropping practices.

34. Financial Risk Risk : higher interest rates causing the undesirable outcome of lower than expected income/cash flow Risk Management??? Do Nothing Cash Flow

35. Financial Risk Risk : higher interest rates causing the undesirable outcome of lower than expected income/cash flow Risk Management??? Cash Flow Transfer the risk via fixed rate loans Do Nothing

36. Financial Risk Risk : higher interest rates causing the undesirable outcome of lower than expected income/cash flow Risk Management??? Transfer the risk via fixed rate loans Reduce the cost of the negative impact via lower debt financing Do Nothing Cash Flow

37. Human Resources Risk : Cost of hired labor not showing up or making a mistake causing lower production, injury, or death Risk Management??? Reduce the Risk via: -Regular employee meetings -Training programs -Well written position descriptions -Incentive plans

38. Human Resources Risk : Cost of hired labor not showing up or making a mistake causing lower production, injury, or death Risk Management??? Transfer the risk via disability and other insurance

39. Human Resources Risk : Cost of hired labor not showing up or making a mistake causing lower production, injury, or death Risk Management??? Avoid the risk by not hiring any employees

40. Environmental Risk Risk: manure spill causing the undesirable outcome of fines, lawsuits, and loss of income Risk Management??? Reduce the risk via: -Education -Facilities -Monitoring checks and systems -Field and manure trt. practices

41. Environmental Risk Risk: manure spill causing the undesirable outcome of fines, lawsuits, and loss of income Risk Management??? Transfer the risk via liability insurance

42. Disability Risk Risk : poor health causing loss of income Risk Management??? Incapacitated Avg. Health Reduce incidence or impact of risk via: -Annual health exam - Quit smoking -Exercise -Disability Insurance -Co-Manager

43. So, I now know What Risk Management is, but How do I do it???

45. Prioritizing Which Risks to Address First Probability of Happening Potential Impact Act if cost effective No action required Immediate action Action required Small Catastrophic High Low

46. No one "right" decision The "right" decision depends on the characteristics of the operation and individual decision-maker Risk Management Is An Individual Decision

47. Risk vs. Profitability

48. Porter’s 5 forces Is a framework for the industry analysis and business strategy development formed by Micheal E. Porter of HBS in 1979. Attractiveness in this context refers to the overall industry profitability. An " unattractive " industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven down to zero.

49. Assessing the Balance of Power in a Business Situation The Porter's 5 Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you're looking to move into. With a clear understanding of where power lies, you can take fair advantage of a situation of strenght , improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning toolkit. Conventionally, the tool is used to identify whether new products, services or businesses have the potential to be profitable. However it can be very illuminating when used to understand the balance of power in other situations too.

52. Usage Strategy consultants occasionally use Porter's five forces framework when making a qualitative evaluation of a firm's strategic position. However, for most consultants, the framework is only a starting point or "checklist" they might use " Value Chain " afterward. Like all general frameworks, an analysis that uses it to the exclusion of specifics about a particular situation is considered naїve. According to Porter, the five forces model should be used at the line-of-business industry level; it is not designed to be used at the industry group or industry sector level. An industry is defined at a lower, more basic level: a market in which similar or closely related products and/or services are sold to buyers.

53. A firm that competes in a single industry should develop, at a minimum, one five forces analysis for its industry. Porter makes clear that for diversified companies, the first fundamental issue in corporate strategy is the selection of industries (line of business) in which the company should compete; and each line of business should develop its own, industry-specific, five forces analysis. The average Global 1,000 company competes in approximately 52 industries (lines of usiness).

54. Your Risk Management Team Extension Agent Lender Broker Dairy Consultant Milk Buyer Input Supply Managers Other Producers Insurance Agent Nutrition Consultant Crop Consultant Attorneys Technical College Instructors

55. Success leads to both personal and legal complications

56. : )