Managing risk on a farm is an arduous and never-ending task. Although tools are available, such as marketing contracts and crop insurance, the information available is constantly changing and so is the uncertainty surrounding it. Farmers are never really done with managing risk. Therefore, it is imperative that farms strive to create a good risk management culture where everyone manages day-to-day risk in a positive and timely manner.
Five key principles describe a good risk management culture within an organization: (1) the ability to anticipate decisions; (2) adequate resources and capacity to respond to changing conditions; (3) the free flow of information in and through the organization; (4) a willingness to learn and adapt; and (5) risk management is integrated into all decision-making processes. What follows is a brief description of what is meant by each of these five key principles and how to incorporate them into your operation.
1. Ability to anticipate decisions
Proactive decision making is based on a thorough understanding of the objectives and goals you are trying to achieve with your decisions. Taking the time to think about and write down important goals related to a decision you make pays off not only in improving that decision, but also in creating awareness that allows you to better recognize future decisions that will also help you achieve these goals. For example, recognizing that employee satisfaction is important for retaining good employees can allow you to better anticipate opportunities to offer a key employee an inexpensive but highly valued reward, such as time off to attend a sporting event to a child or positive recognition in front of his or her peers. This reduces uncertainty about employee job satisfaction and manages the risk of staff turnover.
2. Adequate resources and capacity to respond to changing conditions
Building capacity to manage risk and uncertainty is a proven method to reduce the impact of risk. It comes at a cost, but the most resilient operations have a Plan B or even a Plan C they can turn to when changing conditions make Plan A no longer a feasible option.
3. Free flow of information in and through the organization
The free flow of information in and through the organization is so critical to success when it comes to managing risk. More than anything, risk management is about having useful information and having that information is about communication. Within an organization, developing a culture where the workforce openly shares information, good or bad, creates an environment where people don’t repeat mistakes and where everyone pushes others in a positive direction. On the other hand, effective communication with people outside the organization allows the best information to flow through the operation to inform decisions.
4. Willingness to learn and adapt
A willingness to learn and adapt is needed to leverage valuable information amid changing conditions. Communication is key to developing the willingness to learn and adapt. The more people communicate with each other about the possibility of change, the more comfortable they feel in deciding whether or not to make the change. Isolated decision makers tend to have difficulty adapting because they lack the support to confidently steer the operation in a different direction.
5. Risk management is integrated into all decision-making processes
Decision makers often add risk management to the end of a decision when weighing a choice against the effect of uncertainties. Risk management is best achieved when the decision-maker integrates the consideration of these uncertainties into the decision-making process. The sooner you recognize valuable information that you don’t know for sure, the better the chance that you will gather the best information to help you make the best choice.
Imagine if you had access to all the information in the world, including what was going to happen tomorrow or in a week. This information would obviously make risk management a moot point as there would be no risk to manage. Of course, this fantasy world does not exist. Risk management is not so much about predicting the future as having relevant and reliable information on which to base your decisions. Where does this information come from? This comes from building a strong risk management culture where everyone values excellent communication and where people understand what the organization is trying to accomplish as well as the uncertainties that could affect it.
Source: University of Nebraska-Lincoln, which is solely responsible for the information provided and is fully owned by the source. Informa Business Media and all of its affiliates are not responsible for any content contained in this information asset.