How well do you asses risk? My belief is that most overestimate various risks in life. That said, I recognize that I have a unique risk profile given my role as a CFO which generally attracts risk averse personality types. Over the years I’ve pursued (or rather dabbled in) numerous actives that aren’t aligned with the conservative CFO risk profile. On the list are scuba diving (with a two decade gap between logged dives), snow skiing, mountain biking, and water skiing. I own a Harley (that I don’t ride enough), have had a Ferrari up to 145 MPH on a track, attended the BMW Car Control School (twice) and once went rappelling (with a friend who was in the Navy and highly skilled). With a bit more thought I could probably double the number of items on the list. While I wouldn’t consider any of these extreme, every time I’ve completed a corporate personality profile test my risk tolerance shows up as a bit of an outlier compared to my career choice.
While all these activities have a certain degree of risk, it can be mitigated with proper training and practice. The same is true in business. Whenever you’re going to consider something new it is important to both accurately assess the risk as well as to mitigate it. Some examples:
- If a piece of capital equipment doesn’t work out, what is the resale value? The difference between what you pay and resale is the true capital at risk.
- What is the ratio of upside to downside? I wouldn’t risk $1 million to gain $100,000 but risking $100,000 to pursue $1 million might make sense.
- If the company loses $x pursuing a new initiative, what is the overall impact? Does it lower profits a bit or break the bank?
- What are the skills necessary to successfully implement a new initiative? How do they align with those in your organization and how can you fill any gaps? Can you supplement with a consultant or outside expert to increase the likelihood of success?
Further, it’s important that you consider the risk of doing nothing. Years ago, a boss and mentor said to me “Sometimes the risks you sit are greater than the risks you run.” In other words, doing nothing is not necessarily risk free. By not pursuing that new opportunity you’re leaving the door open for someone else to do so and pass you by.
Years ago at Unisys, I did some work on risk. What I learned was that every project had to pass the corporate hurdle rate which was based upon the average risk of the firm. The result was that low risk projects couldn’t pass (low risk generally equals low return) while high risk projects often exceeded the hurdle rate (at least on paper before they were implemented). Over the time, the result was to favor risky projects thereby increasing the risk profile of the firm. The recommendation was that the firm adopt risk adjusted return rates. My work stemmed from a low risk project that got turned down because it didn’t pass the hurdle rate. It was clearly one the company should have pursued. Instead, they lost the business to a competitor.
How well do you assess business risk? Do you consider mitigation strategies? And most importantly, do you take on reasonable risk or avoid it at all costs?
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]
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your cash is flowing. know where.®
Ken Homza
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