Risk Management in Business
Risk management decision making process
Risk management involves anticipating possible changes in expected outcomes, including monetary returns, as part of decision making. This may be due to factors such as weather, interest rate changes, pests, diseases, prices, economic conditions, changes in the natural resource base, health, family circumstances and personal factors. For an interesting review of risk management for the farm sector, see the "Risk Management" article in the Good Times Hard Times magazine.
Although much has been written on management practices for dealing with weather-related crisis circumstances these concentrate on physical aspects such as water storage, crop rotation etc. and very few focus on managing the business side of crisis response.
Most producers can manage many of these risks themselves, particularly production-related risks, through good planning and farm practices. For example, managing production risks has been the major focus for most producers through:
There are some forms of risk where producers may need to look at off-farm instruments in order to manage potential negative impacts. Examples include the following, all of which are dealt with in greater detail later:
Risk management is a proactive way of dealing with the vagaries of agricultural business systems. In the longer term, the benefits derived from informed decision making will be greater than any reactive support by governments.
Managing business risk is common practice in both large and small businesses from a wide variety of sectors. There is now a solid understanding of the connection between well-managed risk and improved performance. Although global corporations are taking a very wide view of risk management including actively taking risks in the pursuit of profit, here we restrict risk management to protecting yourself from unforeseen circumstances.
According to the Australian - New Zealand Standard on Risk Management (AS/NZS 4360:1999) risk management is "the logical and systematic method of establishing the context, identifying, analysing, evaluating, treating, monitoring and communicating risks associated with any activity, function or process in a way that will enable organisations to minimise losses and maximise opportunities".
Risk management normally includes both reducing the probability of a negative event and enhancing your ability to reduce or avoid costs associated with that event. Since weather- and market-related risks are uncontrollable, here we will concentrate on business procedures and practices that allow farmers to prepare for and respond to unforeseen events. Note that risk management is just one aspect of an overall business strategy.
Two key risks for producers are incidents like fire and flood, and unexpected price movements. NSW Agriculture has prepared some useful information on risk management for stock owners in times of fire and flood, and to view it go online and CLICK HERE. The National Australia Bank has developed price hedging tools to help mitigate the risk associated specifically with commodity price fluctuations, and to view these tools go online and CLICK HERE.
Risk management units are part of many diploma type courses such as the Diploma in Agriculture and the Advanced Diploma in Agriculture.
Risk management decision making process
Risk management is a decision making process that requires multi-skilled collaborative work between farmers, specialist advisers and government. It involves a number of steps: establishing the context; risk identification; risk assessment; likelihood/frequency of occurrence; implementation; and monitoring and review. These steps are outlined below and illustrated in Figure 1.
(i) Establish the context
At this stage the context for the risk management strategy is mapped out. It will be different for each organisation and can include relevant policies, institutions, broad principles and the organisation's aims and values. These can strongly influence the final strategy.
(ii) Identify risks
Identification is a relatively straightforward yet crucial stage in the risk management process, where risks may be more (eg. frost) or less (eg. pest plague) expected.
(iii) Assess Risks
Once risks have been identified, an assessment of possible impact and corresponding likelihood of occurrence should be made. This should take into account the financial impact, and the impact on your viability and objectives. The analysis may be either qualitative or quantitative.
(iv) Likelihood of occurrence
The likelihood of a weather-related risk occurring can be evaluated based on a combination of previous experience and predicted trends (see Section 5). The likelihood of a market-related risk occurring is based on national and world events combined with regional, national and international policies.
(iv) Implementation of risk management
Details of implementation will be different for each individual and methods for developing these are addressed later in this Section. Options include avoiding the risk, reducing the frequency of occurrence, reducing the impact, and transferring the risk to another party. It is important to ensure that sufficient human and financial resources are allocated – this may require a cost-benefit analysis.
(vi) Monitoring and review
It is important that any risk management strategy, once implemented, is periodically reviewed to allow for changing circumstances – both within the farm and due to new information received regarding changing weather patterns. An effective risk management strategy requires adaptation, continued improvement, attention to management skills and on-going commitment.
Figure 1 The stages of risk management outlined in the Australian Standard. Risk Management (AS/NZS 4360:1999), (1999) Standards Australia TM, Revised Edition.
For more information about risk management and agriculture, a useful publication is "Risk Management: for Climate, Agriculture and Policy" written by Anthony Clarke, and produced by the Department of Agriculture, Fisheries and Forestry.
