Risk Tolerance and Strategic Decision-Making

Insights

For most companies, success is a coin flip. If not within the first year, business failures often happen within the first several years. In fact, a recent report shows that approximately 3,200 startups went under in 2023 alone. But the businesses that make it work have one thing in common: they know how to manage risk.

Managing risk comes down to making the right assessments, calculating your moves properly, and learning from mistakes. Companies that can pull this off are able to outlast the competition and make it out of this critical early stage. 

Focus on Strategic Risk

Operational risks are associated with day-to-day functions and processes; financial risks involve money management, including investments and liquidity. Strategic risks, however, result from the broader aspects of a business’s strategy and high-level decision-making, holding more of an ‘umbrella’ position above other categories.

For example:

• Choosing businesses or organizations to partner with presents strategic (reputational) risk based on how existing and prospective customers view your new affiliation.
• Choosing a tech vendor over its competitors will likely result in some difference across functionality, ease of use, integrations, reporting capabilities, productivity tools, or other factors affecting the platform’s effectiveness.
• Hiring additional personnel may provide a startup with the bandwidth to bring on more clients, increasing revenue. But those salaries also increase burn rates—and the pressure on those hires (and the whole business) to outperform the associated costs.

To make sure your operational and financial standing remains in good health, focus on these strategic risks first. Quantify potential strategies using metrics like risk-adjusted return on capital to better factor risk into ROI estimates or profit per employee to determine whether new hires will offset their associated costs.

Then, incorporate these metrics into strategic planning to make sure that any new endeavors align with your company’s risk appetite and don’t significantly jeopardize your core operations or financial stability.

Sustainable Risk Management

Continually measuring your performance against financial sustainability indicators allows you and your company to track progress, benchmark success, and adjust strategies as needed. These metrics—like liquidity, solvency, profitability, and operating efficiency—help ensure you allocate your resources wisely, maintain revenue streams, and meet stakeholder expectations for financial performance and long-term outlook.

However, you should also look behind these conventional metrics to those that can help provide more insights that might otherwise be lost between the numbers. For example, innovation rate—or “the percentage of revenue that comes from new products or services”—can help inform whether to continue efforts to enter adjacent markets or it may indicate that you need to invest in awareness initiatives to promote yourself.

Aligning business strategies with these sustainability goals ultimately secures your organization’s capacity to adapt, grow, weather volatility and uncertainty, and thrive in a competitive environment.

(Continually) Employ Strategic Tools in Decision-Making

Strategic methods for analyzing impacts—like ‘Strengths, Weaknesses, Opportunities, and Threats’ (SWOT)—let you visualize and think through the potential effects of decisions before making them. Moreover, impact analysis encourages you to consider potential externalities and side effects, helping you recognize perspective limitations and better anticipate future challenges.

In other words, these methods present a more complete snapshot of risks and rewards tied to any strategic move.

However, like any snapshot, it only exists as a moment in time.

To improve the accuracy of your strategic analysis, make sure to document your process and evaluate it again afterwards. Where possible, employ data to improve the quality and reliability of your decisions—remembering to look beyond gut feelings and anchor choices in concrete information and projections.

Learn From Failure

Embrace failures as opportunities for learning and strategic growth. Learning from failure is an essential strategy in modern business, turning setbacks into opportunities for growth. Organizations that examine their missteps gain insights that guide future success. However, people (and work environments) tend to be failure-averse. So, learning from failure requires starting with your work culture.

Adaptability is a primary component of this approach. Think of some of the biggest companies you know—many of them have only achieved such massive success due to learning from their failures. Slack began as a video game company that pivoted to further developing out the internal communication platform their staff used to coordinate. Conversely, Google released Wave, a real-time collaboration platform that was hailed as the next big thing at the time. However, the product failed to gain traction and was eventually discontinued.

Despite the initial failure, Google was able to implement many of the lessons learned from this product to produce the wildly successful products we know today such as Google Docs and Google Drive.

Upgrade Your Financial Strategy with Tomoro

Navigating risk and strategic decision-making is no small feat. Whether you’re making personal financial choices or managing a growing business, the right support can make all the difference.

At Tomoro, our team of seasoned professionals is committed to helping you manage risks, make calculated decisions, and achieve long-term growth. From crafting financial plans to guiding you through pivotal investment choices, we’re here to support you at every step on your path to success.

Contact us today to see how we can help you navigate the world of financial uncertainty and come out on top.