When Wingecarribee Shire Council decided to buy synthetic collateralised debt obligations from Grange Securities it told Grange it had a conservative investment strategy. The Council did not expect to be mislead.

Risk management is all about risk identification and assessment and preparing for that unexpected event (as well as more likely events) and its consequences.

Before X Factor became a television show it was the name given to an unexpected event that could seriously damage a business.

Your risk appetite is the amount and type of risk that you are willing to accept in your business decisions.

When you decide to cut staff or make an investment, launch a new product or service, lease a new store or decide to outsource processes have you worked out the consequences that you are willing to accept in making that decision?

How important is your reputation? How much of a capital buffer do you have? What if your cash flow was interrupted? What if your key staff resigned because of a change you made?

Are the risks consistent with your overall business strategy?

All of these factors are relevant to the amount of risk you are prepared to accept and what you do to manage it (eg due dilgence).

A combination of multiple, small, expected but unrelated events could be a major unexpected event.

Even if you comply with all rules and regulations you may still be undertaking commercial risks that your business is not able to deal with.

Does your business have the reserves to cope with the risk?

Have you assessed the impact of under-resourcing, deliberate non-compliance, fraud, delays or communication breakdown?

What is the worst outcome that could be considered to be acceptable?

Courts have emphasised that penalties for non-compliance should not be regarded as a cost of doing business.

When assessing risk you look at the probability of an event occurring and the seriousness of its impact if it does occur.

You also look at what you can do to reduce the probability of the event occurring and to mitigate the losses if it does occur.

But before then you should understand your risk appetite.

Bright Law can help you develop policies and processes to identify and manage your risks.