How To Calculate Your Risk Tolerance
Develop a better understanding of your ability and willingness to accept corporate risks.
Building your risk tolerance:
- Identify and measure what is too much enterprise risk
- What to do if you already have too much risk
- Evaluate risk management measures to select best ones for your culture and organisation
Develop a better risk assessment process to embed the best risk reward culture for your business regardless of the economic cycle.
Are you a risk taker or just reckless?
Not understanding the types and size of corporate risks means you are reckless, not a risk taker. Risk takers accept and manage corporate risks after careful assessment. Once their risk knowledge is enhanced they take decisions that on the balance will bring the reward they want. The risk they need to take to receive that level of reward is acceptable. To others it maybe unacceptable, but they is irrelevant. What’s important is that you take risks in the full knowledge of the level of risk you are taking, not just crossing your fingers and hoping for the best.
To build a more certain future for your business you need to determine your risk tolerance and set your risk management strategy accordingly.
Using a risk-based decision strategy for your business can be more productive. It can also maximise your business performance by targeting the highest reward return based on the highest level of risk you can tolerate. If you and your business have a low risk tolerance then it is crucial not to overstretch your assets as this could result in disastrous collapse of your business.
Risk Appetite is something different. Your risk appetite should be less than your risk tolerance. Building in headroom between risk appetite and risk tolerance will build in a “safety buffer or margin” for your business so that you can flex-up should you need to in order to seize new business opportunities. The buffer will also provide some protection against changes in external risk drivers you may have no control of, but can absorb in your margin between risk appetite and risk tolerance.