How to improve your risk/reward ratio

person writing on notebook

By Dr. David Demetrius

The vast majority of people would agree that there is an inevitable trade-off between risk and reward.  Taking higher risks is only worth it if the potential upside is greater.  For example, choosing between investing in high interest-bearing junk bonds and low interest-bearing government bonds is very much an individual choice dependent on the investor’s personal financial situation and how risk averse they are.

But can you manage your risks better and improve the ratio?  I invite you to spend a few minutes carrying out the following simple exercise.

First make a list of ten events that could seriously negatively impact your business.  The risks may be external (e.g. industrywide, economic, competitive, legal and regulatory, customer needs and wants, or a fire destroying all your head-office files and computerised records) or internal (e.g. the loss of a key member of the team, a cashflow crisis, strategic focus, parent company support, patent and trademark protection).

Next classify each item as ‘extremely unlikely to occur’, ‘could happen’ or ‘a reasonable chance of occurrence’.

Now comes the crunch.  Do you have any items on your list that are not classified as ‘extremely unlikely to occur’?   If you have, can you confirm that there is an agreed contingency plan in place to handle such an occurrence?   Based on having done this exercise with quite a number of organisations, I am willing to bet that you cannot confirm this in all cases.  Think about that for a minute.  You are saying that there are events that would have a significant impact on your business and have a significant chance of occurrence, but you do not have a plan in place to handle them!

There are many different risks potentially facing an organisation and identifying them all and making plans for preventing or mitigating their occurrence is an important exercise.  Even highly unlikely events should be planned for if their occurrence would be dramatic enough. The destruction of the Twin Towers on 9/11 comes to mind.

So, returning to the risk/reward ratio, one way of improving the ratio is by ensuring contingency plans are in place, thus reducing the risk.

You may possibly have had difficulty making your list of ten risks in the exercise above, but there are many tools available to help identify potential risks.  Examples of tools that you might consider using, some of which you can handle yourselves and some needing an external facilitator, include:

  • Event inventories.
  • Facilitated workshops
  • Interviews, questionnaires and surveys
  • Process flow analysis
  • Loss event data tracking

This exercise of identifying your risks and planning to handle them will improve your risk/reward ratio immeasurably.

 

Dr David Demetrius is Founder and President of the Emadin Group, the one-stop shop for business & trade acceleration into – and out of – Europe (www.emadin.com) . He has over 25 years’ experience in the management, growth and sale of businesses of all sizes, across industries and is a director of several European companies. From 2000 to 2007, David was the Chairman for Continental Europe of the Institute of Directors and a member of the governing Council of the Institute in the UK. He is also an honorary life member of the European Foundation for Management Development.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s