Generally, risks in business relate to costs/finances, time, or opportunity. Any action you take involves recognizing the risk and whether the action is worth the risk involved. Your risk tolerance varies depending on what part of your life you’re considering. For instance, I have a high risk tolerance for someone showing up a little late for a meeting but a low risk tolerance for technology not working as I expect.
Risk Tolerance, Strategic Goals and Your WHY
Knowing your risk tolerance is important in leading your business. Generally, risks in business relate to costs/finances, time, or opportunity. Any action you take involves recognizing the risk and whether the action is worth the risk involved.
Your risk tolerance is also related to your strategic goals. Pursuing your strategic goals puts your risks in perspective, helping you see how a short term loss in one area can lead to long term gains in another area. Your strategic goals, aligned with your WHY, provide the underlying foundation for your risk tolerance.
When you see how the risk relates to your WHY, you are more comfortable taking measured risks with the expectation of a return.
Risk Tolerance in Action
As a farmer’s daughter, I saw this relationship between WHY, strategy and risk tolerance every year at planting time. Planting a crop is expensive. You have costs for seed, fertilizer, fuel and equipment. You invest in all these inputs with no guarantee of a bumper crop at harvest time. Along with all the costs of production, you have additional factors of rain and temperature over which you have no control. Only nature brings the rain and temperatures conducive to a good crop.
There is a lot of risk in planting a crop. At the end of the day, the seed must go into the ground if there is to be a harvest. Strategically, a farmer plans for the best possible yield. Keeping in mind his WHY, supplying food for a hungry world, he makes strategic decisions to provide the highest possible harvest. He manages his risk tolerance through this decision-making process. Ever looking toward the bountiful harvest in the fall, the farmer takes the risk of loss and focuses on the potential for growth.
This farming example relates to any endeavor. We all have costs and inputs within our control, along with factors that are out of our control in our organization. When you know your WHY and plan strategically for the best possible outcomes, you can take the risk to plant the seeds of success.
Recognizing Your Risk Tolerance Pays Off
Recognizing your risk tolerance is important. Along with this, you need to be aware of the cost involved in attaining the goal you’re setting out to accomplish. When you know the cost and your tolerance for the risk involved in attaining it, you’re more resilient on the loss side, knowing the potential upside of risk is coming after you persevere. Understanding the relationship between the risk, your strategic goals and your WHY helps you define and manage your risk tolerance.
Have you considered your risk tolerance in your business? How does your WHY relate to your risk tolerance?