Growing a company is about taking risks. Leaders must explore possibilities and try new things to remain relevant in their industry. But how do they know which risks are acceptable and which take them too far?

Achieving the ideal balance between growth and risk is challenging, especially in today’s unpredictable economy, but with the right approach, you will make decisions that lead your company to success.

A Risk Management Approach

Risk is a necessary part of business. It can lead to increased revenue and expansion and position you as a leader in your field. However, leaders must utilize risk management, considering the risk-return tradeoff before they move forward.

The risk-return tradeoff requires leaders to consider how much they stand to lose vs. how much they may gain. Data insights into market statistics, your customer base, and the current economy will help you measure the advantages and disadvantages of each move.

How to Assess Risk

Leaders should know their comfort level with any given risk to determine their parameters. They can assess their accepted risks by looking at risk appetite, tolerance, and threshold.

Risk Appetite

Risk appetite is the degree of uncertainty you’re willing to accept for a possible reward. You can’t put an exact number on risk appetite. However, it can be determined through company culture. If you like to run a business that places you in an uncomfortable space, always on the edge of success or failure, your risk appetite is high.

Risk Tolerance

Risk tolerance measures the amount of risk you can withstand before a reward. For example, you may consider how much money and time you can lose investing in a new product and getting it up to speed before it potentially pays off for your company. You must also consider how much you stand to gain if the product is successful and whether it will counter your losses.

Risk Threshold

The risk threshold is the point at which the risk is no longer worth the reward. Typically, it is determined as a quantifiable number. For example, a company may set $20,000 as a risk threshold, determining that any project that could lead to a loss of $20,000 or more is not worthwhile.

Risk vs. Reward Calculation

Some aspects of risk calculation are difficult to quantify. However, you can break it down by using a simple equation as follows:

• Estimated net profit of the risk divided by the maximum loss if the risk doesn’t pan out

Compare the result against your risk tolerance and threshold to guide your decision-making.

For example, if you are considering investing in equipment that costs $200 and you believe it can generate a revenue of at least $1000, your risk/reward ratio is 10:2 or 5:1. Determine how that compares to your risk tolerance and risk threshold to decide if you should move forward.

Integrating a Risk Management System in Your Company

Once leaders understand the metrics involved in risk management, they can integrate them into their companies in the following manner:

• Identify Risks: Identify the possible risks a system presents and measure how they may impact your company
• Use Data: Data provides insight to help you better understand how risk impacts your company. Ensure you access diverse data sources and accurate information.
• Utilize Risk Mitigation: Risks are prevalent in almost any new system, but you can reduce their impact with the proper risk mitigation strategies. Consider how to minimize waste, efficiently allocate resources, and respond to risks as they occur.

Why Resilience Matters

Let’s take a moment to re-examine risk appetite. This factor is the hardest to measure but may be crucial in your decision-making process.

Leaders are often comfortable with some risk, but how does it impact your workers and other stakeholders? If they don’t feel secure in the business environment, they could move on, presenting other losses that should factor into your decision-making.

CEOs can prevent losses by building resilience in organizations with the following approaches:

• Consulting with relevant stakeholders before making critical business decisions, keeping risk assessment in mind
• Promoting resiliency in the workforce by ensuring workers feel supported and can voice their opinions
• Encouraging innovation and autonomy, making workers feel comfortable embracing change

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