Home > Risk > Risk and the lemonade stand: how it matters in the simplest settings

Risk and the lemonade stand: how it matters in the simplest settings

September 14, 2019 Leave a comment Go to comments

Your neighbors are asking you for help.

Their young children, ages 7 and 9, want to set up a lemonade stand in front of the house. While it’s not a busy road, there is a periodic flow of traffic. Most are people who live in the neighborhood and observe the 25 mph speed limit.

The parents are interested in letting their kids run a stand because of the life lessons it will bring them. They also support the children’s desire to raise money that will be donated to feed homeless people in the general area. (The homeless are a few miles away, not close to the family home.)

The parents have developed a list of ‘pros and cons’ but are undecided. Since you help people at work understand this strange idea of ‘risk’ (although you prefer to talk about ‘what might happen’ and the likelihood of achieving objectives), they have asked for your advice on how to assess the situation, their options, and the best path forward for the family.

Pros

  1. It would help the children understand what it is like to run even a small part of a business.
  2. The children would develop skills in selling and communications.
  3. It will encourage their desire to help others.
  4. They will have to stay focused for hours, rather than being drawn away to play on their devices.

Cons

  1. They might be discouraged if sales are poor.
  2. There is a safety concern with adults they don’t know, and because they will be close to the street.
  3. The parents will have to be there the entire time, even though they have other things to do.

How would you help? Make whatever assumptions you would like.

Hint: this is a ‘risk management’ challenge. What are the parents’ objectives and how would you go about assessing whether the likelihood of achieving them is acceptable and, if not, what actions to take?

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  1. Robert Arvanitis
    September 14, 2019 at 4:45 PM

    Intelligent parents will invest the time to be present but at a distance, obviating the stated risks to the children,
    The stated benefits are true.
    “Disappointment” is actually an important life lesson.
    In fact, the greatest life lesson was overlooked – regulators, bureaucrats, tax collectors are all part of the too-high and still-growing cost of government. That’s a wonderful lesson to learn and the sooner the better. Don’t wait until the first pay check!
    Lesser lessons include cost of good sold, inventory risk, labor costs, fixed overhead, consumer marketing, fickle retail, marketing, salesmanship, customer relations.
    Best of all, children will absorb all that, internalize it and have it at their future disposal, intuitively.
    Excellent proposition!

  2. September 15, 2019 at 4:43 AM

    Hi Norman. There’s not enough space to carry out a full analysis but I would say that the parents’ objectives probably are:
    Keep the children and their customers, safe
    Raise money for the homeless
    Give the children some life skills

    Example risk to the first objective (assuming home-made lemonade): Customers become ill due to contamination of lemonade.
    Control: Use safest water, quality lemonade ingredients (or use purchased lemonade), remind children about basic hygiene standards.
    Residual risk acceptable (i.e, below risk appetite)? yes

    Example opportunity to the second objective: Offer free biscuits (cookies) if three lemonades purchased.
    Benefit: increased sales which more than cover cost of cookies
    Residual benefit acceptable: Yes

    There are many other risks to consider with appropriate controls to apply. Such an analysis is not uncommon. For example, UK schools might be expected to carry out such a risk analysis if wishing to sell lemonade. Ideally, the objectives, opportunities, risks and controls should be determined in a risk workshop involving the parents and children (that’ll teach them life skills).

    Ultimately the final decision is down to the risk appetite of the parents…but that’s another story.

    David Griffiths (www.internalaudit.biz)

    • Norman Marks
      September 15, 2019 at 6:26 AM

      That’s a good start, David. I like those objectives. Moving to assessing the individual ‘risks and opportunities’ and then determining whether the pros are greater than the cons is more difficult – here as in business.

  3. Gitare
    September 16, 2019 at 10:58 AM

    So the parent’s objectives are for children to learn meaningful life lessons as well as help the children support the homeless people. Great! As to the life lessons, are there particular ones they’d like to place emphasis on? If so, would the children’s chosen option of setting up a lemonade stand be the best option to provide those lessons? The reality is that there will be many “desirable” activities but some will be more impactful than others in relation to the achievement of the target objectives. If the lemonade stand happens to be the ideal activity, how confident are they that considering the pros and cons of the lemonade stand activity, the objectives set ab initio will be met? What gives them that comfort?

  1. September 16, 2019 at 5:02 AM

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