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How to determine your risk appetite as an organisation

There are a lot of things to take into account while managing a business, such as your organisation's risk appetite and your own personal risk tolerance. This article discusses risk appetite and provides advice on determining your organisation's level of risk tolerance.


What is risk appetite?


The amount of risk a business is ready to accept in order to accomplish its goals is known as its "risk appetite." This is the level of risk required to accomplish a goal, encompassing a medium-or low-risk appetite for medium-to-low-returns and a high-risk appetite for higher returns. More formally, a business establishes a risk appetite when it determines the precise, quantifiable limits on the risks it will take.


Factors to consider in determining risk appetite


When determining its risk appetite, an organisation has to take a number of things into account. These factors will direct the actions the organisation takes to establish and determine its risk appetite. They include:


  • The norms of the organisation

  • The risk culture and attitude of the management

  • The types and amounts of risk present in the industry of the organisation, among others.


 Setting a risk appetite framework


It is crucial for business leaders to ascertain their level of tolerance for risk across the board and to develop a methodology for measuring risk appetite that can be used for planning. Here are a few steps to follow:


Identify the main risk categories - You must decide which risk categories the organisation should prioritise before you can assess the risk appetite. Usually, these categories contain hazards that have the potential to affect the organisation's entire operations and strategy. This might assist you in assessing the risk tolerance and taking a fresh look at the task.


Decide on limits for risk - Determining a limit for the amount of risk you are willing and able to handle is the next stage after recognising all risk categories. This limit should resemble a ‘stop-loss’. This is decided by carefully analysing the organisation to gain a comprehensive knowledge supported by information about the boundaries of each risk the organisation is taking.


Create a strategy for managing the risk - The last stage is to develop a plan of action and strategy that the organisation would employ both inside and outside of its risk appetite after determining and settling on a risk limit. When the organisation is performing as planned within the organisation's risk appetite, there should be a strategy in place, as well as a mitigation plan in case the organisation departs from that appetite.


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