REVISE:  Asses Your Personal & Business Risk Tolerance

In Mistake #1(M1), we shared the importance of understanding your industry cycle and choosing to rise with the tide, or seizing the opportunity to grow, gain market-share and enhance your capabilities.  In Mistake #2 (M2), we demonstrated the many advantages to planning, investing in and executing, your growth plan during the downcycle.

Mistake #3 (M3) is all about understanding your own personal risk profile as well as that of the company (i.e. the appetite toward taking business risks and how risk profiles impact business performance).

Most business owners are comfortable taking some level of risk.  As the economy becomes stronger, some will want to sprint out of the gates.  Others, however, are uncomfortable with making decisions without more clarity on the state of the economy and may want more certainty to better predict outcomes.  Whatever your business and personal level of risk tolerance, it is critical to understand what it is and the risk profile of your team.

Why?  Because an individual’s relationship with risk is what drives behavior and it:

  1. Changes the most during economic swings;
  2. Causes most disagreements regarding strategy between executives; and
  3. Introduces unintended consequences when attempting to implement growth strategies or changes within the organization.
Showing a Reactive approach waiting too late to grab the recovery

When you plan and understand what risks you are taking, and how to manage and mitigate them, your business can move forward more quickly – in any environment.  If you wait until the time is right (i.e. more certainty), then you will miss the beginning of the opportunity altogether.

Similarly, being too hasty and going ‘all in’ without a thoughtful plan is equally detrimental. Often it is fear of the former that can paralyze the leadership team who wants perfect information, so as not to make a hasty error.

M3 is all about acknowledging and understanding what risk profile you and the team have and planning for maximum impact.

What are the Risk Profiles?

To illustrate this concept, we use a simple 10-point scale to denote a level of risk.

Table Showing 5 categories of risk across 10 points and their chracteristics

None of these scores are good or bad, what matters is having the understanding, the conversation and the agreement about the level of risk the company is willing to take and the actions that are acceptable to grow the business again.

We all know businesspeople who, when the market goes down, sell everything and hunker down with their cash; and others that just ride it out. Understanding the ”why” – this difference in behavior – is essential.  Moving into cash quickly, to ensure you have reserves to invest in the future is very different than stuffing your cash into the mattress until there are no more dangers in the business world.

Knowing your personal limits and executing a strategy consistent with your limits is ideal.  When risk profiles and business strategy are outside of acceptable levels it can lead to – panic.  And with panic – poor decisions are made, and often too late.

There is a second consideration that goes along with understanding appetite for risk and that is understanding your volatility appetite (e.g. the degree of variation of your desired outcome and the actual outcome).

As with risk tolerance – some people can tolerate volatility and others cannot.  If you consider the stock market – sometimes the markets are strong and keep going up.  Then, when the market comes crashing down there is a huge panic from people with a low tolerance for volatility. On the other hand, there are those who understand that the market goes up and down all day long – every day – and when the market goes down (as they know it will), they execute their plan for a ”down market” calmly.  These individuals have a higher tolerance for volatility and adapt more quickly.

Risk tolerance and volatility tolerance are intertwined, but they are not mutually exclusive.  You can have a low-risk individual who has high volatility tolerance.  These individuals are going make a very small bet and write-off the investment in their heads at the onset.  That way if the bet does not pan out – they do not panic.

There are also the high-risk individuals who want a sure thing (but with low volatility) – this might seem like a contradiction.  These individuals are willing to take riskier bets sooner because they believe they have identified and worked out all the risks of that investment.  They then may choose to reduce the impact of volatility by dispensing their cash investment in tranches or other triggers.  This is the modus operandi of many Venture Capital firms.

To help prepare and work successfully through uncertain times,
leadership teams should agree where their organization’s current risk level stands.  Specifically, to get a jump start on your competitors, ask yourself these questions:

  1. What is your overall business risk profile and how will that impact the behaviors in your company?
  2. What is the risk profile of each leader in the business?
  3. What level of risk are you willing to take coming out of the recession?
Showing the impact of a proactive approach to planning and grabbing the recovery

The big mistake here is that in a recession or down market – 90% of leadership teams won’t do this simple, yet enlightening exercise. Many think it is too soon to think about “what is next” when things are still going down or they haven’t clearly seen the bottom. Working through this process will leave your competition in the dust once things begin to clear.

The key message in M3 is acknowledging and understanding what risk profile you and the team have and planning for maximum impact.   Need help? Or want to learn more about assessing and integrating risk appetite into your strategic planning and decision making process press “Lets Connect”.

If you are not willing to risk the unusual, you will have to settle for the ordinary.  ~ T. S. Eliot

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