Before you cook a meal you should consider who is dining with you and how much food will be sufficient. Some people have a higher capacity to eat than others, and sometimes one or more will be hungry – will have a higher appetite.

It’s the same in business. Before determining your appetite for risk, you need to consider your capacity to both bear and manage risk. Bearing risk is being able to handle the consequences of risks taken that have not worked out. For example, financial impact or ability to manage the fall out. Managing risk is the ability to identify what must go right, what could go wrong and plan well for both.

Last week I wrote about taking the wrong approach to a problem by asking the wrong question (4 Wrong Questions). This week it is about a wrong approach. Putting the cart before the horse if you will.

I have been running lots of combined strategic risk and risk appetite workshops for boards and execs this year. Interestingly, sometimes the request comes in to update appetite and then the strategic risks. When I explain the issue about understanding capacity, we tackle risk first, and appetite second.

I hope this is helpful. For more on this, see my paper on Risk Appetite.