Enterprise Risk Management for Small Businesses
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Transcript of Enterprise Risk Management for Small Businesses
© 2011 Towers Watson. All rights reserved.
Enterprise Risk Management for Small Businesses
A presentation to IABA Annual Meetingby Jay VadivelooLu MaJackie Bogensberger
August 2011
© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 2Presentation1
Outline
Motivation for ERM for Small Businesses (ERMSB) initiative
Why ERMSB does not exist?
Similarities and differences between ERM for large corporations and small businesses
ERMSB initiative at the Goldenson Center
Case study – Between Rounds Bagels
Student perspective on doing an ERMSB project
Where do we go from here?
Conclusion
© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 3Presentation1
Motivation for ERMSB Initiative
Small business are the largest, fastest growing, and most important segment of the American economy
Small businesses experience one of the highest failure rates compared to large corporations in other industries
Lack of any institutional or fomalized risk management for small businesses
© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 4Presentation1
Why ERMSB does not exist?
Small businesses are unwilling to pay for this service May be financially unable to do so
May not recognize the potential benefit of ERM
Fear of change
As a consequence, ERM principles and literature are tailored primarily to large corporations
© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 5Presentation1
Similarities with ERM for large corporations
Fundamental steps are similar Identify and prioritize risks
Model and quantify the risks
Create risk-mitigation strategies
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Differences with ERM for large corporations
Needs to incorporate business growth strategies as well
Need to focus on reasonably likely risks with serious consequences versus low likelihood events with serious consequences
Business owners are very knowledgeable about risks and business growth strategies
Easier to assess and manage risks of a small business, but consequences of a risk shock are far greater
Qualitative risks may be just as important as quantitative risks
ERM analysis covers a shorter time horizon (3 to 5 years) and should be revisited afterwards
© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 7Presentation1
Differences with ERM for large corporations: continued
A well defined ERM analysis which incorporates business growth strategies can materially improve the sustainability and profitability of a small business
© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 8Presentation1
ERM Initiative at the Goldenson Center
In place for the past two years
Students funded by the Center to undertake ERMSB projects in the region
Service offered free-of-charge to small businesses
Students work in teams and provide a formal written ERM report and any software tools at the end of the project
© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 9Presentation1
Risk Management Report for
Between Rounds Bagels
University of Connecticut
Graduate Program in Actuarial Science:Lu MaJackie BogensbergerEric AndersonMaura Bey
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Outline
The Bagel Industry Background Recognition of Risks for Between Rounds Data Analysis
Micro Level Macro Level
Suggestions/Conclusions
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The Bagel Industry
There are about 3,072 bagel shops at the 2007 census Operate at 11.4% profit margin
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Recognition of Risks
Competition Bagel Stop Production Co, Bruegger’s Bagel Bakery and Lox Stock &
Bagels, Inc, Dunkin’ Donuts
Seasonal trends Trends due to the economy Cost efficient items Waste management Advertisement
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Data Analysis
We used the information complied from Between Rounds’ register reports to create a user friendly pivot table (in Excel)
In order to calculate the percent profit for each item, we assumed a 33% cost
From there we looked at best selling items (contribute to 50% of profit) over a monthly and year basis
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Pivot Table
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Monthly and Year Best Sellers
03/07/2010 - 02/10/2011 Item # Item Name Family Group % Profit 191 **DOZ* BAGELS DOZEN BAGELS 3.41% 1024 Turkey Sand SANDWICHES 3.31% 807 Bacon Egg Cheese BRKFAST SAND 3.05% 1125 Coffee Med HOT BEVERAG 2.87% 11306 PLAIN CC FOOD PREPS 2.84% 1021 Chix Salad Sand SANDWICHES 2.77% 808 Saus Egg Cheese BRKFAST SAND 2.47% 1019 Tuna Sand SANDWICHES 2.34% 1002 Tom Tom Club SANDWICHES 2.19% 1124 Coffee Small HOT BEVERAG 2.08% 1202 Fountn Soda COLD BEV 2.08% 802 Egg Cheese BRKFAST SAND 2.03% 1012 Ham Sand SANDWICHES 2.00% 1009 R.B. Sand SANDWICHES 1.91% 1126 Coffee Lge HOT BEVERAG 1.88% 2001 Plain Cream Chs CREAM CHS LB 1.82% 806 Ham Egg Cheese BRKFAST SAND 1.77% 192 **6** BAGELS DOZEN BAGELS 1.58% 1203 Snapple Reg COLD BEV 1.52% 1008 Maple Turk Sand SANDWICHES 1.40% 109 Evrythg Bagel BAGELS 1.37% 1035 Chx CAes Wrap SANDWICHES 1.25% 11301 BUTTER FOOD PREPS 1.25% 1221 Iced CoFfee COLD BEV 1.18% Total 50.37%
June 2010 Item # Item Name Family Group % Profit 1024 Turkey Sand SANDWICHES 4.05% 1021 Chix Salad Sand SANDWICHES 3.45% 191 **DOZ* BAGELS DOZEN BAGELS 3.08% 807 Bacon Egg Cheese BRKFAST SAND 2.81% 11306 PLAIN CC FOOD PREPS 2.78% 1125 Coffee Med HOT BEVERAG 2.48% 808 Saus Egg Cheese BRKFAST SAND 2.35% 1002 Tom Tom Club SANDWICHES 2.22% 1202 Fountn Soda COLD BEV 2.17% 1019 Tuna Sand SANDWICHES 2.16% 1012 Ham Sand SANDWICHES 2.15% 802 Egg Cheese BRKFAST SAND 1.99% 1009 R.B. Sand SANDWICHES 1.96% 1124 Coffee Small HOT BEVERAG 1.75% 1221 Iced CoFfee COLD BEV 1.74% 2001 Plain Cream Chs CREAM CHS LB 1.68% 1126 Coffee Lge HOT BEVERAG 1.62% 1203 Snapple Reg COLD BEV 1.54% 192 **6** BAGELS DOZEN BAGELS 1.53% 806 Ham Egg Cheese BRKFAST SAND 1.49% 1008 Maple Turk Sand SANDWICHES 1.49% 1035 Chx CAes Wrap SANDWICHES 1.41% 1814 Lox DELI MEAT 1.35% 1115 Joe To Go HOT BEVERAG 1.29% Total 50.51%
© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 16Presentation1
Gross Profit (per store)
South Windsor/Vernon Most profitable year: 2006 Least profitable year:2009
Vernon Branch Monthly
0.00
5,000.00
10,000.00
15,000.00
20,000.00
25,000.00
30,000.00
35,000.00
40,000.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Month
Gross Profit
2006 2007 2008 2009 2010
South Windsor Monthly Profit
0.00
10,000.00
20,000.00
30,000.00
40,000.00
50,000.00
60,000.00
70,000.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month
Gro
ss P
rofi
t
2006 2007 2008 2009 2010
Overall down slope since 2006
Economy has slowed
— Less people eating out
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Gross Profit (per store)
Manchester 2010 was most
profitable and the store saw an overall increase in profit from 2006 to 2010
Notable: All three branches show lower numbers in January and February
New Years resolutions
Cold Weather
Saving money after the holiday spending sprees
Manchester Branch Monthly
0.00
5,000.00
10,000.00
15,000.00
20,000.00
25,000.00
30,000.00
35,000.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month
Gross Profit
2006 2007 2008 2009 2010
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Total Gross Profit for All Locations
Yearly Gross Profit by Branch
0.00
200,000.00
400,000.00
600,000.00
800,000.00
1,000,000.00
1,200,000.00
2006 2007 2008 2009 2010
Year
Gro
ss P
rofi
t
South Windsor
Vernon
Manchester
Total Gross Profit (All 3 Locations)
0.00200,000.00400,000.00600,000.00800,000.00
1,000,000.001,200,000.001,400,000.001,600,000.001,800,000.00
2006 2007 2008 2009 2010
Year
Gro
ss P
rofi
t
Manchester is the only growing branch
Manchester is the smallest branch-Overall profit has decreased, but as has the economy
We see a positive outlook in 2010 in all stores
Check 2011 data to see if up turn continues
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Our Suggestions
Bagel Promotions: advertise on the side of a vehicle, coffee promotion, healthy promotion during New Years Resolution Time
Online Advertisement: Groupon, Facebook
Drive Thru Menu: consider the potential for traffic, new menu items (based on best sellers)
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Our Suggestions (cont.)
Data Collection: adjust your “family groups” to be more condensed or keep the names more consistent.
Keep count on waste Strategizing to Appeal to other clientele: consider re-branding to
appeal to younger customers/college students
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THANK YOUFrom all of us, thank you for allowing us to analyze your business.
You have been more than cooperative and we appreciate it!!
© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 22Presentation1
Student perspective on ERMSB initiative
Not your typical actuarial project
Forces students to think out-of-the-box since each ERMSB project is unique
Students work in a team and are involved from start to finish— Students work directly with the business owners
— Final report, models and presentation done by students
— Invaluable experience and immediate gratification of having recommendations implemented by owners
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Where do we go from here?
Need to expand the Center’s ERMSB initiative on a larger scale
Any large scale implementation should be supported by large corporations, private foundations and government agencies and not small business
Most cost effective way to do these projects is to engage students at universities all over the country
Goldenson Center could help facilitate and coordinate any large scale ERMSB initiative.
© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 24Presentation1
Conclusion
The Goldenson Center has just scratched the surface in showing how an effective ERM culture can be created with small businesses
ERMSB is a form of micro risk management and can be replicated globally as well with funding from large corporations and other entities and university students doing the projects
Huge payoff since any reduction in the failure rate for small businesses would be a boost to the overall economy.
© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 25Presentation1
Contact Information
Jay Vadiveloo, Ph.D, FSA, MAAA, CFA
Professor-in-Residence & Director
Janet & Mark L. Goldenson Center for Actuarial Research,
University of Connecticut &
Senior Consultant
Towers Watson