How to make a risk matrix for your company
written by Juan Pablo Calle, On November 24, 2022
The risk matrix allows companies to assess and control identified risk situations that may arise. We tell you what you should take into account to do it.
All companies, regardless of their size, number of employees or industry to which they belong, are exposed to risks that can affect their operation, reputation and even the continuity of their business. This is why it is important to have a risk matrix that allows to visualize, quantify and control, transfer or mitigate them and that serves for decision making.
What is a risk matrix?
It is a very useful tool to manage and control risks (threats and vulnerabilities) that may arise in the operation, in the implementation of services, in security or in any other process of the company. Having this matrix also helps managers and personnel in charge to make quicker decisions on how to act in order to face the risks that are more likely to occur and impact the operation.
How to make a risk matrix?
Before making a risk matrix it is important that you define a framework or methodology for risk management, for example, the ISO 31000 standard or the COSO framework.
Once you have defined this and identified your company's risks, keep in mind the following steps to make and implement your risk matrix:
1. Prioritize the identified risks
In the different processes of the company, take into account the scope and context. Some of the risks you may have identified, for example, are:
- Natural disasters such as earthquakes, floods, fires.
- Interruption in the supply of raw materials.
- Data leakage or interruption of technological infrastructure.
- Damage to critical operational equipment.
- Failure in the supply of public services.
- Non-compliance with the legal framework.
- Computer crimes, cyber-attacks.
- Fines and sanctions.
- Increased criminal activity in the area of operation or criminal activity against the company.
- Lack of adequate insurance against possible damages.
- High turnover of human talent.
- Workplace accidents.
- Economic, social or health crises (pandemics, for example).
Keep in mind that the risks you identify and prioritize must be related to your industry, your environment and your processes.
2. Evaluate both the frequency or probability of occurrence of each of the risks, as well as the impact or consequences they will have.
Or the consequences they will have. To do so, consider these classifications:
|1. Unlikely||1. Negligible|
|2. Possible||2. Minor|
|3. Occasional||3. Moderate|
|4. Probable||4. Major|
|5. Frequent||5. Catastrophic|
Let's take an example: a company dedicated to the manufacture and marketing of chairs, desks and tables for offices and social spaces, identifies among its main risks the damage of one or more of its equipment for cutting wood and other materials.
This risk is classified as probable in frequency (4) and catastrophic in impact (5) because if the damage materializes, which can occur due to excessive use of the equipment, incorrect handling, a sudden power outage or any other cause, the personnel working with the equipment will stop working with it until there is a solution.
And this will generate delays in the whole process of manufacturing and assembling the furniture. In addition, if the damage is not fixed in the shortest possible time, it will cause impacts on the delivery and marketing of the products.
As with this risk, which is inherent (it has a frequency and an impact), this same company may have other risks: labor accidents, failures in the supply of public services, attacks to its computer systems, etc. and all of them must be defined with a frequency and an impact.
Regardless of how many and which ones they are, the key is to include them in the matrix and assess them correctly in order to know which are the most critical for the operation and continuity and that in case they occur, controls can be implemented to help mitigate them.
When controls are applied to an inherent risk, it is considered a residual risk.
3. Graphically represent all the risks that you have previously assessed.
The best way to do it is in a map like the following one and using the colors green, yellow, orange and red, this will facilitate its visualization and will help you to have clarity of which are the most critical risks for your company.
This way you will be able to manage them in a clear way and carry out actions to prevent or mitigate them.
Recommendations for managing your risk matrix
The use of colors in the risk matrix helps you to understand the type of risk your company may face and to make decisions to counteract its impact:
- The green boxes, although they do not indicate an alarm, it is important to monitor them and analyze them periodically to check that everything is still in order.
- Pay attention to the yellow and orange boxes to avoid future surprises in the operation.
- Implement controls and action plans for the red boxes to help you mitigate their probability of occurrence or, if they do occur, their impact.
Now that you know this, we invite you to put it into practice in your organization, and a simple way to do it is through technological solutions such as the Pirani risk management software, a tool designed so that you can make the risk matrix yourself, without depending on anyone, and in just a few minutes, and also so that you can easily record processes, risks and controls.
Remember that properly and consciously managing your company's risks helps you to guarantee regulatory compliance and ensure the continuity and sustainability of your business.
Did you find this content useful to learn how to create a risk matrix? Leave us your comments.