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”