Risk Appetite: What it is, and how it relates to business outcomes

What is Risk Appetite?

Risk appetite is the level of a risk a company is willing to take on in order to reach their objectives. Different companies will have different levels of risk appetite, or in other words different companies are willing to take on different levels of risk. Risk appetite is not stagnant, and changes over time. Factors such as industry, company culture and competitors can all impact how much of a risk appetite that a company has.

KEY TAKEAWAYS

• A company’s level of risk appetite can change over time

• Different factors such as company culture, industry, competitors and more can impact a company’s level of risk management

• A high risk tolerance is associated with a high risk appetite, while low risk tolerance is associated with a low risk appetite

Having a High vs. Low Risk Appetite

How big a company’s risk appetite is is linked to how much risk tolerance a company has. Company’s with a high risk tolerance are able to handle or subsidize the negative impacts of risk much better than company’s with a low risk tolerance. This means that companies with a high risk tolerance can have a high risk appetite, while companies with a low risk tolerance often have a low risk appetite. Being able to gauge your company’s risk tolerance is the first step to being able to decide what level of risk appetite is appropriate. 

Balancing Risk and Reward

What motivates companies to take on a high risk appetite and potentially face negative consequences? Some motivators for taking on a higher risk appetite can include shifts in the market such as innovative new ideas or breakthroughs, changes in your company culture or the creation of new strategic goals. While a high risk appetite does open up your company to potentially negative impacts from risk, there’s also a potential for high reward and to further solidify your company’s success. 

Conclusion

In summary, risk appetite is important when it comes to weighing how much risk a company is willing to take on in order to reach certain goals. Risk appetite is fluid, and is related to how much risk tolerance a company has. While taking on risk always has a potential for negative effects, it also can help open new doors for potential rewards and success.