As cooperative executives, you are saddled with the responsibility of identifying investment opportunities for your cooperative because profit must be made. However, we understand that every investment comes with a level of risk and depending on some factors, cooperatives fall under one of these three (3) categories of risk tolerance at a particular time:
A. Aggressive Risk Tolerance
B. Moderate Risk Tolerance
C. Conservative Risk Tolerance
A key step in risk management is to analyse your cooperative’s risk appetite. In other words, how much risk are you willing to be exposed to?
Defining a cooperative’s risk appetite is a difficult step. A risk appetite is a strategic balancing act that weighs risk against opportunities and member services. There are no simple magic bullets for determining risk appetite, but there are a few obvious factors to consider.
Cooperative goals and investment objectives: Cooperatives with aggressive growth targets may have a higher risk appetite, while those focused on stability and steady returns might adopt a more cautious approach.
The next step is to consider the buffer between the risks that could occur and the cooperative’s ability to meet its major objectives. That buffer is usually measured in terms of financial capacity such as working capital, cash flow and equity. The board/admins could consider how much cash flows could change before the cooperative could not meet loan covenants or was forced to reduce cash patronage, delay equity retirement or modify capital expenditure plans.
Financial health and resource allocation: Cooperatives with stronger financial reserves and predictable cash flows may be more willing to engage in risky ventures compared to those with tighter financial constraints.
Past experiences: Successes in risky ventures may embolden a cooperative to take more risks, while failures might lead to a more cautious approach.
Stakeholder expectations: The expectations of key stakeholders such as members of the cooperative and financial partners, can influence a cooperative’s risk appetite. For example, pressure from members for short-term returns might lead to a lower risk appetite in terms of long-term investments.
Considering these factors what do you think your cooperative’s risk tolerance level is?