Managing Risk - NCSU

Managing RiskMurphy's Law

▪ Who are your target customers and what do they value?

▪ What products will you offer and how is it unique?

▪ Who are your competition? And how will you position yourselves?

Market Questions to Address:

▪ Review Homework▪ Who are your customers▪ What is size of your market ▪ Market planning ▪ Competitive analysis ▪ Marketing strategy 4-P

Greensboro Curb MarketPLACE

Busy market, lots of competition, and good number of vendors

Currently not in need of vendors

15-20 farms that sell fruits and veggies

Greensboro Curb Market

Blackberries

PRODUCT▪ Product Description

▪ Sweet, luscious, and plump berries

▪ Product Characteristics▪ excellent texture and firmness- Great to simply eat or create a wonderful summertime dish

Blackberries

▪ Appearance▪ Large berries as big as your thumb and have a dark velvet complexion

▪ Quality▪ We only pick the ripest and highest quality berries for your enjoyment and we are pickier about our berries than anyone else

Blackberries▪ Benefits

▪ Wonderful with ice cream, no hassle sweetness to enjoy simply by themselves, rich in antioxidants, high in vitamin C, ultimate brain food

▪ Differentiation▪ Hand selected varieties for sweetness, hand picked for quality, packed with your needs in mind, no insecticides are used with any of our berries

Greensboro Curb MarketPRICE$6-$7 quart at Local State Markets$6 at grocery store 5/8

Greensboro Curb MarketCompetition Evaluation▪Step 1▪ Do your homework▪ Stalk them on social media, webpage▪ Make note of how they sell and who they promote to

▪ Step 2▪ Visit the Market- are they like you thought?

Greensboro Curb MarketWHAT TO LOOK FOR▪Products and Services Offered▪Price▪Quality▪Location▪Customer Service

▪ Convenience

Greensboro Curb MarketWHAT IS THE GOAL▪Find something that can set you apart

▪ Product▪ Selling point▪ Value proposition

▪Will it appeal to your customer?▪What makes them want to buy?

▪ What market channels will you use?▪ How will you price your product?▪ How and When will you will you

communicate with your buyers or customers

Market Questions to Address:

•IS There a Market?

http://ncfarmschool.ces.ncsu.edu/

Goals for Tonight

▪ Defining risk▪ Identifying farm risk ▪ Evaluating Risk ▪ Business Structure ▪ Business Insurance ▪ Taxes ▪ Regulations

Risk

The chance of loss or unfavorable action associated

with an outcome.

Quick Example

▪ Identifying your risk

▪ Evaluating Risk

▪ When driving what are some of the risk, on the drive here?

Effective Risk Management

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Effective Risk Management

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Effective Risk Management

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Identifying Risks• Assume nothing

• Do your best to determine what risk are present

• Consult with lawyer or insurance agent

• Research legal issues

Evaluating Risks• What level are you comfortable with??• How likely is a risk to occur?• What’s the severity if it occurs??

– Does it result in a stubbed toe or loss of life???

• What result will it have on your business & family?

• Is it worth it???

Key Risk Questions • Identify Questions:

–What disaster might happen?–What is worst case scenario?

• Evaluate Questions:–What events can occur that require a response?

–What scenarios are most likely?–What would cause the greatest disruption of your business?

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Risk Assessment• Likelihood of this happening- not fear

based reasoning but information based• Impact of this happening- not

preference based prioritization but effect based priorities

• History- including the past problems to assess future possibilities

• Personal experience

Categorizing Risk

A method to determining risk you will face as a part of your risk evaluation

• Production - What risk exist?

Types of Risk

Types of Risk

• Human Risk - What risks exist?

Types of Risk

• Marketing - What risks exist?

Types of Risk

• Casualty - What risks exist?

Types of Risk

• Legal/regulatory - What risks exist?

Types of Risk

• Technology - What risks exist?

Types of Risk

• Relationship- What risks exist?

Types of Risk

• Financial - What risks exist?

In-Class Activity

• Butterman Farms–What risk do they face based on

the information you have been given?

So what do we do about risk?

PLAN

Planning

Strategic planning --“Doing the

right thing”Tactical planning --

“Doing things right”

Factors Affecting Your Business

• Things I have direct control over- Internal

• Things I manage

– Employees– Equipment– Animals– Land use

• Things I have no control over-external

• Things I manage around

– Weather– Government– Banks– Suppliers

SWOT Analysis■SWOT stands for

■Strengths ■Weaknesses■Opportunities■Threats

Strategic Planning Exercise

• Select a enterprise

• Conduct a SWOT analysis identifying

• Strengths

• Weaknesses

• Opportunities

• Threats

Mitigating Risks• Cover Yourself!• Think realistically• Decide what risks are within your

control. • Evaluate options for mitigation

– Can you change protocol to lessen risk?– Fill in the holes or get a $1 million accident policy

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Risk Mitigation/Handling• Now that you have assessed the risks how do

you deal with them?– Avoid– Control– Transfer– Assume

• Know the costs of the options !

Insurance• Transfer Risk

• Property and General Liability • Covers property losses form events like fire and

theft• Liability in events someone is injured

• Commercial Business Liability• If farm is doing what is considered no farming

activities, Fresh produce processing

• Product Liability• Protects against of injury from contaminated fresh

produce • Many retails are requiring • Price

Insurance• Key man Insurance

• Provides income if critical member of the business becomes sick or dies

• Unemployment Insurance• Required if business has one or more employees for 20

weeks in calendar year, or if paid gross wages of $1,500• Workers Compensation

• Protect workers injured on job, required if business has 3 or more employees

• Crop Insurance• AGR Adjusted Gross Revenue • Need five years records

Other mitigations• Business structure to limit liability• Employee handbook/training• Certifications- GAP, HACCP• Continuing education• Records•BMPs- (proper fencing, trickle vs overhead irrigation, frost protection)

Production Risk

Enterprise diversification• Try different production practices or practice

•enterprise diversification by• Growing different crops• Trying combinations of crops and livestock• Identifying different end points in the same production•process• Growing different types of the same crop

Do your homework the on new enterprises of the day. ▪Do you know anyone who has made a profit with new enterprise▪What are the total investment cost▪What are the possible returns or range of returns

Financial Risk

Financial risk develops fromregular business activity•Cost and availability of debt/capital•Ability to meet cash flow needs•Capability of generating additional equity

Owner Equity & Risk

• Your ability to increase owner equity in your operation is an indication of basic business profitability

• If you notice a downward-trend in your owner equity over time, you are seeing a lack of profitability in the business

Managing Financial Risk

• Other ways to manage your financial risk are:

• Budgeting cash inflows and outflows• Maintaining accurate and up-to-date

financial records• Conducting a basic financial analysis• Developing annual financial statements

Strawberry Cash FlowCash Flow Projection -

Summary 18000 pounds $1.50 Upick $2.00 Prepick

June July Aug-Sept Oct Nov Dec-Jan Feb March April May

Cash Inflow

Cash on Hand $25,000

Strawberry Upick Sales $3,240 $7,560

Strawberry Prepick Sales $8,640 $12,960

Total Cash Inflow $25,000 $0 $0 $0 $0 $0 $0 $0 $11,880 $20,520

Cash Expenditures

Capital Purchases $18,000 $10,000 $2,000 $3,450 $0 $0 $0 $0 $0 $0

Equipment Operations and

Rent $224 $510 $740 $55 $15 $16 $43 $412 $42 $136

Supplies and Materials $113 $1,367 $4,817 $218 $206 $1,338 $373 $329 $686 $1,994

Hired Labor $0 $0 $500 $0 $0 $750 $0 $500 $500 $2,000

Total Cash Expenditures $18,337 $11,878 $8,057 $3,723 $220 $2,104 $416 $1,242 $1,227 $4,130

Net Cash Flow $6,663 -$11,878 -$8,057 -$3,723 -$220 -$2,104 -$416 -$1,242 $10,653 $16,390

Cumulative Net Cash Flow $6,663 -$5,214 -$13,271 -$16,995 -$17,215 -$19,319 -$19,735 -$20,977 -$10,325 $6,065

Labor Risks

Labor risks you should become familiar with include•Work that is not done, is done poorly, or not on time•High indirect labor costs can be incurred•Potential conflict with employees•Laws and regulations•Worker safety regulations/OSHA requirements

Mitigating Human Risks

You can reduce human resource risk by effectively training your employees•Training should be ongoing to encourage motivation and skills development to maintain peak efficiency•Consider shifting some jobs to contract or custom labor

– May provide a lower cost alternative– Specific tasks can be assigned to contract workers– May outsource human resource administration

Mitigating Human Risk

• You can further reduce human resource risk by monitoring your operation’s hiring practices

• Always check personnel qualifications• Follow the hiring laws for your state• Also have plans for personnel

transitions• Estate transfer

Basic Forms of Business Structure• Sole proprietorship• General partnership• Limited partnership

– Family Limited partnership (FLP)

• Limited liability company (LLC)• C corporation• S corporation• Trust

Important Questions• Who has ownership?• Who will carry tax liability?• What % will you and other be taxed?• What tax scenarios could happen in the

future based on your growth plan?• How will income be distributed?• How will profits be distributed?• Who will carry general liability, other

legal risk?• What if the business fails?

Sole proprietorship

• One owner• Owner and entity not distinct• Operate as one wishes within the law• Tax liability falls on the business income

at the owner's individual tax rate

General partnership• Two or more owners• Partnership agreement

– Express or implied– Written or oral

• Presumption of equal rights of management• Presumption of equal allocation of profits & losses• Presumption of agency

Limited partnership

• One or more general partners• One or more limited partners• Managed by general partner• Liability of partners

– General - unlimited– Limited - investment

• Taxation– Family Limited partnership (FLP)

Warning on Partnerships• Any thing with two heads is a monster

and should be handled with care

• Legal advice is a must

• Get it in writing

• Trust is great but a binding agreement is better- What if…..

Limited Liability Company (LLC)

• Hybrid between a partnership & a corporation

• One or more owners• Limited liability• Taxes - check the box rule• May or may not have perpetual

existence

C corporation

• Distinct legal entity (legal person)• Created and operated under state laws• Shareholders have limited liability• Perpetual existence• Multiple classes of stock• Separate taxable entity• Shareholder rights limited

C corporation

• Governance– By directors– Operated by officers– Directors elected by shareholders– Fiduciary obligations of officers and directors

• Close corporations– Minority rights– Oppression

• Formalities

S corporation

• Created under state law; same as C corporation

• Limitations of IRC– Number & nature of shareholders– Partnership tax treatment

Food safety

• Food Safety Modernization Act (FSMA)– http://www.fda.gov/Food/GuidanceRegulat

ion/FSMA/default.htm

• Exemption for direct marketing– Labeling requirement

Food safety

• Egg & meat sales– Starting a food business:

http://www.ncagr.gov/fooddrug/food/foodbiz.htm

• State inspection• Egg sales

Insurance terminology

• Policy holder• Insured• Third-party beneficiary• Agent/Broker• Insurable interest• Underwriter

Insurance terminology

• Actuary• Reinsurer

Insurance Needs

• Motor vehicle• Business interruption

Managing Your Insurance

• Notice of changes in operations• Notice of potential claims• Annual review of coverage• Use the resources that your insurance

agent provides– Information about best practices– Discounts for best practices

Insurance Needs

• Disability• Health• Life: owner & key employees• Property/Casualty• General farm liability• Products Liability

N.C. Department of InsuranceFor assistance in finding authorized insurance

services in North Carolina:– N.C. Department of Insurance http://www.ncdoi.comTo check the license status of an agent:

https://sbs-nc.naic.org/Lion-Web/jsp/sbsreports/AgentLookup.jsp

For help w ith unauthorized insurance:– 1-800-546-5664 Consumer services– (919) 733-7487 Agent services

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We cannot direct the wind, but we can adjust our sails.

SWOT Analysis Example• Two Farms approach to external and

internal forces• City devolvement and expansion

– Farm A 100 acre dairy farm – Farm B 50 cow dairy– accept can not control change