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


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


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


Similarities with ERM for large corporations

Fundamental steps are similar Identify and prioritize risks

Model and quantify the risks

Create risk-mitigation strategies


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


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


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


Risk Management Report for

Between Rounds Bagels

University of Connecticut

Graduate Program in Actuarial Science:Lu MaJackie BogensbergerEric AndersonMaura Bey


Outline

The Bagel Industry Background Recognition of Risks for Between Rounds Data Analysis

Micro Level Macro Level

Suggestions/Conclusions


The Bagel Industry

There are about 3,072 bagel shops at the 2007 census Operate at 11.4% profit margin


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


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


Pivot Table


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%


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


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


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


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)


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


THANK YOUFrom all of us, thank you for allowing us to analyze your business.

You have been more than cooperative and we appreciate it!!


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


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.


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.


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

[email protected]

enterprise risk management for small businesses

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