Understanding and Managing Risk Tolerance

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I recently had a great discussion with a few business owners on the ability to take on risk. Each of the companies mentioned that they have been considering different opportunities that were available and each was looking through their own lens of “Risk Tolerance”.

Risk, as defined by Webster Dictionary, is “a situation involving exposure to danger.” While we are not living in a drastic life challenging situation any longer, how this applies to our business, creates an interesting discussion. The “Risk Tolerance” within each of the businesses will be different based on the decisions that were made leading into their personal life and business.

What does risk tolerance mean for your business? How much is an acceptable amount of risk that you can tolerate without putting the company in a position that exposes it to danger?

Taking this one step further — what does risk mean for your own personal life? How much risk are you able to accept within your business before it exposes your personal life to danger?

Risk of not enough time.

Each of us is blessed with 24 hours within a day. The more responsibility we accept the more of our time is used. So when we evaluate a new opportunity it is fun to consider the amount of money this could bring or the impact it will have on our brand, but the risk is the demand of more time.

If we have accepted the responsibility of a family, they will need time. The larger the family the more time is needed to nurture the relationships. It is a huge blessing and can bring immense amounts of joy, but it is a decision that will lower the amount of risk you can accept within your business opportunity.
Our community is another area that we often accept responsibility for without thinking of the amount of time that it will take to fulfill the commitment. The more that we are involved in social life, the less that we are able to accept additional opportunities.

Within your business, there is the law of Essentialism. This states that if you divide your attention between too many different projects you lose the effectiveness of focused time to move each individual project forward. Your risk of not enough time becomes evident when you are unable to spend focused time on the project that is of the highest priority. The risk then is that you are dividing your time, thus rendering projects ineffective.

Risk of not enough Cash Flow or Capital:

The amount of capital or cash available will have a direct impact on the amount of risk that you will be able to accept. The opportunity to invest in a million-dollar building project will only be available if you have the million to invest without risking the health of your income or business cash flow.

The consideration for risk shouldn’t just be based on the bank account figure, but also, on the responsibility, you have toward your financial commitments. So often, I have seen business owners jump from one course to another, from one coach to another, from one marketing idea to another, or whatever the investment means — all in effort to secure that “silver” bullet that will guarantee success. There is no instant path to success, success is a journey. The success lies in the growth of yourself and the company, not the immediate revenue return.

Don’t be fooled by the immediate gratification.

The personal risk often becomes evident not with the business owner but more with how it impacts the rest of the family. Business owners tend to be a dreamer with an optimistic attitude that everything will turn out great. They often fail at assessing the actual risk of capital it will take to fund their dream and thus impacting their personal lives. There is a fine line between adding to the entrepreneurial spirit of taking a risk with a huge pay off in the end and putting yourself and family in a position that they are unable to bounce back from. Be careful not to risk so much that you are unable to recover if things don’t turn out exactly as planned.

Risk of Unskilled and Untrained Employees:

The risk of unskilled and untrained labor will impact the number of new projects or new opportunities a business can accept. If there is a struggle to function in the current capacity, and effectively implement the current business model, it will be impossible to accept a new product or service and then implement it. You limit the amount of risk you can accept by not training your employees or allowing them to continue to operate at an unskilled level.

The other risk that often is associated with employees is the hero syndrome many business owners adopt. They are like the Little Red Hen, “then I will do it myself”. The only challenge with this syndrome is that you are limited within the capacity of your time and your skill level. It is impossible for one person to be an expert at everything. There are many tasks within a company and many different skill sets are needed to accomplish those tasks.

Don’t be fooled into thinking that you can handle all of this on your own!

Train your staff. Trust your staff. Let them learn how you think and operate so that the company can grow into so much more than one business owner is able to do on his/her own.

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