**Unformatted text preview: **ll cause an
undesirable outcome on the financial health of
your business and/or other business/family
goals Components of Risk
Components
Surplus Produc tion t es
erest ra
int
reasing
Inc Hail
EVENT
Cause/Source Currency risk
Disablin g farm acciden t Probability
of 5% Probability
of 15% Probability
of 60% Probability
of 15% Probability
of 5% Potential
Outcome
#1 Potential
Outcome
#2 Potential
Outcome
#3 Potential
Outcome
#4 Potential
Outcome
#5 [minor nuisance] [catastrophic] Components of Risk –
Undesirable Outcome
Undesirable
Put simply, the Undesirable Outcome is
what hurts! Den
ied X - lower than expected production
- catastrophically lower production
- inability to meet cash flow
- loss of income
- catastrophic loss of income
- loss of life
- loss of buildings & other resources
- loss of health
- inability to get a permit or loan Components of Risk –
Event (Cause/Source of Risk)
Event
The Event is what caused the hurt:
- weather event
- injury/death of an employee
- neighbors action against you
- surplus production of milk
- widespread poor grain production
- low quality inputs
- divorce or disagreement
- downward slide in general economy
- and countless more!!! Components of Risk – Probability
Probability
Probability is a measure of the likelihood that the Risk Event will occur,
e.g., 30% chance of rain 100 60
40
20 18 17 16 15 14 13 12 11 10 8 A 9 B C 7 0
6 Percent 80 Five Primary Means of
Risk Management
Risk
Reduce
1. Reduce the probability that the event will occur
2. Reduce the impact if the event does occur Transfer
3. Transfer the cost of an undesirable outcome to someone else
3. Avoid
4. Completely avoid potential events thus providing a zero
Completely
probability that they will occur
probability Do Nothing
5. Let the risk happen and be ready to bear the consequences.
5. Financial Risk
Risk: higher interest rates causing the undesirable
higher
outcome of lower than expected income/cash flow
outcome
Risk Management??? Cash Flow
Do Nothing 46
46 Financial Risk
Risk: higher interest rates causing the undesirable
higher...

View
Full Document