Tool 1.11 A farm business risk assessment template with example

The content in tool 1.11 is adapted from Holmes Sackett and Associates AFBR Business Risk Calculator and Pinion Advisory templates.

Assessing risk is split into two components:

• Likelihood of the risk occurring – rated from almost certain to rare.
• Consequence if the risk does occur – rated from insignificant (dealt with via routine operations) to catastrophic (significant impact).

Likelihood

Consequence or impact

Legend for risk matrix

Risk matrix

Risk assessment template

This template is designed to help prioritise the operating risks in your farm business.

Below are a number of key risks for you to consider (you can always add more of your own), with a space below each to write in the likelihood and consequence level (e.g., A1, D4):

1. Human resource/people risk

   You should look firstly at yourself. Are you the main problem or are you right on top of the job, constantly honing your skills? Hard question this! Can you answer it honestly?

   Next, look at the availability of a skilled labour pool. This can come in the form of individuals suitable for permanent or casual employment, or contractors or contract services. Is there a big pool available? How good does the pool look? What is your track record of finding, employing and retaining first class staff?

   Owners/managers __________

   Employees __________

1. Production risk

   Is your production system efficient? How competitive is your cost of production? A competitive cost of production is a ticket to play if you are in the commodity business. Unless you have it together here, the rest is irrelevant. If your cost of production is uncompetitive, why is it? Is the problem a lack of operating scale, a poor production plan, expense over-runs or what? You cannot properly address this important area of risk unless you know your five year average cost of production for each product and the volatility inherent in it. Having cost of production data for one or two years is a good start and is way better than having none. If your cost of production is uncompetitive, is it because your output is too low or your inputs are too high?

   Output too low __________

   Input too high __________

    

2. Demographic risk
   This can come in two forms. The first form is associated with remote location where community infrastructure is suffering making it difficult to access essential services and attract competent staff. The second form is associated with closer settlement where a real estate premium on land values may be making it difficult to either expand operations or justify staying there. The same form of demographic risk can be created by higher value industry springing up in the district which can afford to pay a significant premium for land over and above its traditional use value.

   Remoteness __________

   Proximity __________

    

3. Environmental risk

   This also comes in two forms. The first form is the environmental health of the farm. Are there any major environmental issues that are constraining production and profitability? For example, salinity, acidification, woody weeds and soil erosion are serious constraints to production. The second form of environmental risk is external. What are the prospects of government or semi-government bodies imposing constraints on your operating activities to satisfy environmental requirements?

   Health __________

   Impositions __________

    

4. Climate risk

   This should be appraised on the basis of frequency and severity.

   Frequency is how often then event is expected to occur, for example, if you experience rain at harvest six years in ten, you have a frequent problem.

   Severity involves the failure of a particular season – this may be due to drought, floods, severe frosts or heavy rain at harvest.

   Relying on memory or guessing is not good enough – ideally you need to access 100-year records to perform an analysis. If the risk of drought or flood or frost in your region is 20%, that means that on average you can expect one of these events every five years. If this is the case, you are then able to factor the economic consequences into budgets and forecasts.

   Frequency __________

   Severity __________

    

5. Economic risk

   This is the risk posed to the business by general movements in the economy. For example, a change in interest rates or a recession can have financial implications for some farm businesses and the market for products if demand is down. In general, businesses that produce commodities are more sensitive to economic risk than those businesses that enjoy pricing power.

   Specific economic risk is industry dependent. Is the industry deeply cyclical? When it troughs is your business still profitable?

   General __________

   Specific __________

    

6. Geographic risk

   This refers to your location. Is your location constraining you in any business sense? For example, if you are in a remote location, does this remoteness significantly increase your cost of production? What other constraints does geography impose? For example, if you own upper river valley country, contiguous expansion through land purchasing can be very difficult. Specific geography refers to the quality of your land. Is it swampy, sandy, steep or rocky to the point where production potential is severely constrained?

   General __________

   Specific __________

    

7. Market risk

   This refers to the overall trading conditions for the enterprises that you are involved in. What is the inherent risk in the market for your product? Overall, is it a local risk where there is competition for the available markets or is it a risk from overseas?

   Domestic __________

   International _________

    

8. Price risk

   This looks at the degree of price volatility over a period of time. The full spectrum of volatility needs to be carefully appraised, preferably so that price deciles can be derived. If price deciles are available, they can be used in budgeting and forecasting and are valuable when doing a full assessment of the financial risk of the business. Can short term price volatility send you into the red? Is the long-term real price trend falling faster than you can lower your cost of production?

   Short term __________

   Long term __________

    

9. Technological risk

   There are two forms. The first is the prospect of the current product being made redundant by technology. A classic example is the smartphone which made the handheld calculator redundant. A second form of technological risk involves the adoption of technology by the business. Do you have a good track record of adopting and using good, proven technology or, have initiatives in this area generally resulted in failure and lost productivity?

   Redundancy __________

   Adoption __________

    

10. Financial risk

    There are two forms, debt and profitability. Is the debt low and manageable or high enough to put the business at risk? Is this position planned and temporary or a long term chronic problem? How much debt can the business afford to carry and where is the current level in relation to it. Is the business profitable enough to provide working capital for all the events in its life? Most importantly, does it generate enough profit to enable adequate provisioning of major future events like succession and retirement?

    Debt __________

    Profitability __________

     

11. Family risk

    How do you all get on? Do you talk openly and honestly, often enough? Is there a thorny issue serious enough to impair business performance? Can most issues be resolved sensibly and amicably through mutual respect and tolerance or is the pressure gradually building to finally explode and blow the business to bits? How about succession? Is it well planned and are all parties still talking?

    Short term __________

    Long term __________

     

12. Safety risk

    Everyone in a business is responsible for working in a safe manner, looking out for each other and identifying unsafe work practices and equipment in the business, but the primary responsibility and duty of care comes back to the owner of the business. Do you promote a safety culture within your workforce? Do you complete workplace and machinery safety inductions and have standard operating procedures (SOPs) for activities in your workplace that require knowledge to undertake? Do you prioritise training opportunities for staff to understand the safe operation of machinery and vehicles and their responsibility in a safe workplace? Do you work with the team to complete a risk assessment for operational risks?

    Owner __________

    Staff __________

Ensure this risk review is followed by an action plan which references the Risk Matrix and action required.

Drought risk as an example

Below is an example of how you would conduct a detailed risk review once you have undertaken the initial whole of business assessment (above).

Historical rainfall records provide the best indication of the frequency and severity of droughts. If you don’t have your own long-term records, historical rainfall records can be obtained from Bureau of Meteorology Climate Data Online – a step-by-step guide to downloading this data can be found in Chapter 8.1 in MMFS Module 8 Turn Pasture into Product. Historical rainfall records can tell you how frequently droughts and below average rainfall has occurred in your area, and looking at the historical data on a monthly basis can indicate the length of time the rainfall would be insufficient or less than optimal for pasture production.

Once the frequency and severity of droughts have been assessed, the potential losses can be identified and quantified. In the case of drought these are:

• The cost of feeding livestock through the drought.
• The cost of protecting soil and pasture resources from overgrazing, resulting in erosion and loss of desirable plant species.

The cost of buying in fodder or feeding out your retained fodder and the cost of feeding need to be accounted for. Widespread drought conditions are often coupled with increases in fodder prices as the demand for grain, hay and other drought feeds escalates. It is important to use drought prices as the input cost rather than long-term average prices for fodder. This will enable you to make a rational decision during the drought about whether it is economical to feed sheep or sell them. In this example, it is assumed that you are feeding to maintain productivity so the opportunity cost for sub-optimal productivity hasn’t been factored in. If you choose not to feed to maintain your normal levels of productivity, this needs to be accounted for in both lost productivity and increased health costs.    

Another large cost during drought often comes from overgrazing of improved pasture. This can result in death of the sown species and/or wind and water erosion of topsoil with the associated loss of nutrients. Neither of these will be a cash cost at the time of the drought but they will affect the productivity of the farm for future years, or will require additional investment to repair. Either way, both costs can be significant and the pasture and soil resources must be protected in a drought.

Calculating the frequency and severity of drought in your region, understanding the cost associated with supplementary feeding or sale and repurchase, plus considering the likely impact on the pasture resources will assist you to develop a drought risk strategy. When making your decisions you should consider whether:

• There is sufficient finance to fund the chosen strategy until the drought breaks (based on assumptions from historical data as to the length and severity of previous droughts).
• There is sufficient management expertise and labour to implement the strategy.
• There are potential animal health, welfare and disease risks associated with the strategy.
• The chosen strategy will deliver the best financial outcome.

Sheep producers have several options to cover drought costs. These are:

• Put profits away either as savings or investments.
• Farm management deposits.
• Purchase or conserve fodder.

Seek advice on the benefits of putting profits into savings, investments or farm management deposits from professional advisors for comparison with fodder conservation. The preferred methodology is less important than the fact that you have recognised the risks and have plans in place to protect your business from them.