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Risk capacity is in the balance sheet

By Clement Chirenje

Risk capacity is the level of risk an organization considers itself capable of absorbing,based on its earnings power,without damage to its dividend paying ability,its strategic plans and ultimately its reputation and ongoing business viability. It is based on an interplay of factors like budget forecast , historical revenues and costs,adjusted for variable compensation,dividends and related taxes( Paul Hopkin)

Risk capacity must be informed by a thorough risk assessment exercise. This assessment need not to be a tick the box exercise to meet regulatory requirements.

Done quite well, risk assessment is the foundational step of being prepared for the unknown because in discussions like these that’s where a range of risks an organization faces and how those risks play into the financials are discussed. It enables decision makers to check whether they have got enough capacity in the balance sheet to deal with the shock.

Most often however, decision makers hastily regroup when the shock is imminent or has already struck. This behaviour leaves a lot of scars and bruises on the balance sheet’s capacity and ultimately the organization as a whole.

Regrouping at crisis time always proves to be too late to start paying attention to the balance sheet. The thinking need to be done well in advance.

Clement Chirenje is an independent risk management consultant.

He can be contacted on +263773489899.

Staff Reporter
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