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 involvedd. 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?
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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:
- Retain--With no protection from downside risk, as
in holding an unpriced commodity.
- 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.
- 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.
- Self-insure--Emergency reserves funded from previous
years" profits.
- 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 occurences
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?
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