Prioritise fiscal management

Section 3 : Weighing risk vs. return

Risk and return are two sides of the same coin. The more risk you’re willing to tolerate, the higher your potential for rewards. Imagine you place a bet. If the odds are 3 to 1, your chances of profiting are high. You’ll win 33% of the time. However, for every dollar you bet, you’ll only get three dollars back.

Now imagine the odds are 100 to 1. In this case, your risk is considerably higher. You’ll only win 1% of the time. But if you do, you’ll get $100 back for every dollar you wager.

In business, this relationship between risk and return must be navigated prudently. Risk is required in order to grow a business, but too much risk can threaten to torpedo the entire venture. Responsible fiscal management seeks areas of competitive advantage, where the risks a business takes are metered by the unique skills present in the organization.

In order to balance risks vs. their potential for gain, it’s important to seek opportunities where the risk to your organization is lower than it might be to other parties simply because of the specific value you bring to the table. You want to maximize your upside potential while minimizing your downside risk. Prudent management means entering into every opportunity with a full understanding of the risks involved.