Enterprise Risk Management for
Small Businesses
A presentation to IABA Annual Meeting
by Jay Vadiveloo
Lu Ma
Jackie Bogensberger
August 2011
© 2011 Towers Watson. All rights reserved.
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
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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
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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
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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
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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
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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
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Risk Management Report
for
Between Rounds Bagels
University of Connecticut
Graduate Program in Actuarial Science:
Lu Ma
Jackie Bogensberger
Eric Anderson
Maura 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
191
**DOZ* BAGELS
1024
Turkey Sand
807
Bacon Egg Cheese
1125
Coffee Med
11306
PLAIN CC
1021
Chix Salad Sand
808
Saus Egg Cheese
1019
Tuna Sand
1002
Tom Tom Club
1124
Coffee Small
1202
Fountn Soda
802
Egg Cheese
1012
Ham Sand
1009
R.B. Sand
1126
Coffee Lge
2001
Plain Cream Chs
806
Ham Egg Cheese
192
**6** BAGELS
1203
Snapple Reg
1008
Maple Turk Sand
109
Evrythg Bagel
1035
Chx CAes Wrap
11301
BUTTER
1221
Iced CoFfee
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Family Group
DOZEN BAGELS
SANDWICHES
BRKFAST SAND
HOT BEVERAG
FOOD PREPS
SANDWICHES
BRKFAST SAND
SANDWICHES
SANDWICHES
HOT BEVERAG
COLD BEV
BRKFAST SAND
SANDWICHES
SANDWICHES
HOT BEVERAG
CREAM CHS LB
BRKFAST SAND
DOZEN BAGELS
COLD BEV
SANDWICHES
BAGELS
SANDWICHES
FOOD PREPS
COLD BEV
Total
% Profit
3.41%
3.31%
3.05%
2.87%
2.84%
2.77%
2.47%
2.34%
2.19%
2.08%
2.08%
2.03%
2.00%
1.91%
1.88%
1.82%
1.77%
1.58%
1.52%
1.40%
1.37%
1.25%
1.25%
1.18%
50.37%
June 2010
Item #
1024
1021
191
807
11306
1125
808
1002
1202
1019
1012
802
1009
1124
1221
2001
1126
1203
192
806
1008
1035
1814
1115
Item Name
Turkey Sand
Chix Salad Sand
**DOZ* BAGELS
Bacon Egg Cheese
PLAIN CC
Coffee Med
Saus Egg Cheese
Tom Tom Club
Fountn Soda
Tuna Sand
Ham Sand
Egg Cheese
R.B. Sand
Coffee Small
Iced CoFfee
Plain Cream Chs
Coffee Lge
Snapple Reg
**6** BAGELS
Ham Egg Cheese
Maple Turk Sand
Chx CAes Wrap
Lox
Joe To Go
Family Group
SANDWICHES
SANDWICHES
DOZEN BAGELS
BRKFAST SAND
FOOD PREPS
HOT BEVERAG
BRKFAST SAND
SANDWICHES
COLD BEV
SANDWICHES
SANDWICHES
BRKFAST SAND
SANDWICHES
HOT BEVERAG
COLD BEV
CREAM CHS LB
HOT BEVERAG
COLD BEV
DOZEN BAGELS
BRKFAST SAND
SANDWICHES
SANDWICHES
DELI MEAT
HOT BEVERAG
Total
% Profit
4.05%
3.45%
3.08%
2.81%
2.78%
2.48%
2.35%
2.22%
2.17%
2.16%
2.15%
1.99%
1.96%
1.75%
1.74%
1.68%
1.62%
1.54%
1.53%
1.49%
1.49%
1.41%
1.35%
1.29%
50.51%
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Gross Profit
(per store)

South Windsor/Vernon

Most profitable year: 2006

Overall down slope since 2006

Least profitable year:2009

Economy has slowed
— Less people eating out
South Windsor Monthly
Profit
Vernon Branch Monthly
70,000.00
Gross Profit
40,000.00
60,000.00
35,000.00
50,000.00
30,000.00
25,000.00
Gross Profit
40,000.00
20,000.00
30,000.00
15,000.00
20,000.00
10,000.00
5,000.00
10,000.00
0.00
Jan
0.00
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Feb
Mar
Apr
May
Jun
Dec
Jul
Aug
Sep
Oct
Nov
Dec
Month
2006
2007
2008
2009
2010
Month
2006 2007 2008 2009 2010
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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
Manchester Branch
Monthly
35,000.00
30,000.00
25,000.00
Gross
Profit
20,000.00
15,000.00
10,000.00
5,000.00
0.00

New Years resolutions

Cold Weather

Saving money after the
holiday spending sprees
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Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Month
2006
2007
2008
2009
2010
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Total Gross Profit
for All Locations
Yearly Gross Profit by Branch
1,200,000.00

Manchester is the only
growing branch

Manchester is the smallest
branch
Gross Profit
1,000,000.00
800,000.00
South Windsor
600,000.00
Vernon
400,000.00
Manchester
-Overall profit has decreased,
but as has the economy
200,000.00
0.00
2006
2007
2008
2009
2010
Total Gross Profit (All 3 Locations)

We see a positive outlook
in 2010 in all stores

Check 2011 data to see if
up turn continues
Gross Profit
Year
1,800,000.00
1,600,000.00
1,400,000.00
1,200,000.00
1,000,000.00
800,000.00
600,000.00
400,000.00
200,000.00
0.00
2006
2007
2008
2009
2010
Year
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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 YOU
From all of us, thank you for allowing us to analyze your business.
You have been more than cooperative and we appreciate it!!
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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.
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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.
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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
vadiveloo@math.uconn.edu
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