Understanding How Much Risk You Should Take On
3/11/2014 12:00 AM
Risk is often seen as something to avoid. But companies do and should take on risks at appropriate times. If you don't take on any risk, your company cannot grow and adapt to changing market conditions. Many companies today, in looking at risk, need to take a qualitative metric approach to make wise decisions. Instead of taking a leap into the unknown, company executives need to understand the risks involved in their business decisions and how to best manage them.
When looking at taking on risk, you need to construct a clear picture of what your company does and what you would like it to do in the future. Any changes to your company should be consistent with your objectives and goals. And in addition, any risk should add to your company's vision instead of take away from that.
One risk many companies take is offering their products in a new market. Will you sell more of your product? Could you run into new risks? Consider that risks are a natural part of adapting to market changes and can help with growth.
When you consider each risk, you should look at objective numbers such as your risk bearing capacity (RBC) . To do this, examine what assets and working capital your company has, then weigh that against the projected cost of the risk. The cost of a risk would include any legal fees, potential financial losses, and other associated costs. If you only assess potential gains and ignore the risks, you could face large financial losses or the complete loss of your business.You can assess the risks by using risk and compliance software.
Beyond the objective numbers, each company needs to understand the risks they take on from several perspectives. How will the risk affect your company? How can it affect your company's goals? How will it affect your employees? If a risk becomes a problem, how can you handle potential problems?
Every critical business decision needs to be made by examining risks and benefits objectively. Senior management should make decisions with others who can help them gain a clear perspective. Taking advantage of good risk management software is a great way to save a lot of time and energy. Balancing risks is an important part of business functioning.