Whether it’s life, a game, or business, there are always risks that have to be taken into consideration when making a decision. And risks we take in life may look different from risks we take in business.
Running a business can be challenging and requires lots of foresight and planning. Depending on what line of business you are in there are various factors like changes in the economy, cybersecurity, climate change, natural disasters that need to be continuously monitored.
But if you have a rough idea of what you are up against while dealing with business risks, then your outcome may not be as bad as you would expect.
What if you had the option to visually evaluate the likelihood and scope of a threat? Then your company can better identify the procedures, controls, and resources available to manage the risk or threat.
This is what a risk assessment matrix will help you do. It acts as an effective tool for businesses in identifying, defining, analyzing, assessing, and prioritizing risks.
No idea what a risk assessment matrix is? No worries, we’ve got you covered!
By the end of this blog, you will walk away with everything you need to know about a risk assessment matrix, the benefits of using one, and the steps involved in creating one!
Why don’t we get right to it then? Let’s go!
What Exactly is a Risk Assessment Matrix?
A risk assessment matrix is a visual tool that depicts the potential risks that could affect a business. It is a project management technique that consists of a single sheet that lists all potential risks, as well as their probability of occurrence and the possible severity of impact.
It is built around two factors:
- The possibility of a risk event occurring
- The potential impact of this risk on the organization.
In other words, it’s a tool that allows you to visualize the likelihood of a prospective risk vs the expected severity of the risk.
All sorts of risks exist, including strategic, administrative, commercial, and external risks. The risk assessment matrix displays numerous risks in a graph, color-coded by severity.
A risk assessment matrix is used by businesses to determine if they have the resources to mitigate or manage risk. It also helps them prioritize which risks to manage based on the possible harm or disruption that these risks may create.
Now that you have a clear idea about the risk assessment matrix, let’s find out why it is necessary to create one!
Read more: Risk Register: Definition, Importance, and Elements!
Why You Must Create a Risk Assessment Matrix?
While creating a risk matrix may be time-consuming, its benefits make it worthwhile. So, let’s take a look at some of them, shall we?
1. Prioritizes Risks
If several risks materialize, having a summary of all potential risks helps you weigh them against one another. This priority will assist your project team and keep them on track if something goes wrong with the project.
2. Minimizes Impact
The unanticipated impacts of a risk that isn’t considered ahead of time may appear to be more severe and devastating than a risk that is discovered and addressed early on. Being aware of the possible effects can help to mitigate or eliminate the impact of a project risk before it happens. Prepare for the worst and hope for the best.
3. Offers Administrative Aid
You can establish action plans and make financial and administrative decisions to provide the most advantageous plan for your organization after you have a clear picture of the risks and how they are evaluated in order of significance.
4. Effective Planning
When everyone in your business is on board and everyone can see what’s going on and is told what to do, the flow of procedures becomes more profitable, economical, and less dangerous by default. Making decisions across departments becomes less risky as information is simplified and shared to be used by all stakeholders.
5. Quick Visual Input
A risk assessment matrix is a visual tool that summarises and simplifies the various risks the business may face in its daily operations. One of the greatest benefits of this tool is that it is a concise sheet that can be referred to by decision-makers and is very easy to read and understand.
6. Inexpensive Process
While the process to create a risk assessment matrix is time-consuming, it is a relatively quick and inexpensive process as compared to other risk analyses. Data can be collected internally and the information analyzed within the management to come up with a reliable matrix personalized for the business.
Clearly, the benefits point to the fact that a risk assessment matrix is something you should be creating. So let’s go over the steps involved in it!
Read more: Risk Management Plan: What is it and How to Create it?
How to Create a Risk Assessment Matrix in Simple Steps?
The risk assessment procedure may appear to be a daunting task. So here are a few simple steps that you can follow:
Step 1. Identify Possible Risks
The main purpose of the initial phase is to get a complete picture of all the present risks.
For this, you will have to begin the process by carrying out a brainstorming session, where you and your team can simply list down all the potential risks that you can imagine. This will create a collection of concepts that will form the very basis of the risk assessment matrix.
Try to think of the common categories of risks and focus on whether you can foresee any potential risk in your project category by category. This will help you identify and deeply understand the potential risks involved.
Here’s an example of how you can categorize your risks:
- Strategic: Coping with competition
- Operational: Potential scarcity of resources
- Financial: Capital cost and expenditure
- Market: Creating a social media presence
- Technology: Managing and Maintaining data security
Do this over and over again till you exhaust all possible lists of risks.
Step 2. Understand the Risk Criteria
Now that you have identified your company’s risks, you’ll want to analyze them. But before you do that, you need to build a standard set of parameters to help you analyze it. This is a crucial step since these parameters will guide the rest of the process.
Two key factors that are often used in a standard risk assessment matrix include:
- Likelihood – the level of possibility of the risk occurring
- Consequence – the level of impact the risk can create
Besides these two factors, you can also consider other elements, such as vulnerability and onset speed, however, this is optional.
Read more: Operational Efficiency: Definition, Importance & Ways to Improve it!
Step 3. Evaluate and Classify the Risks
Now that the potential risks are identified and the criteria established, the next step is to evaluate or rate the risks. This stage involves a quantitative examination of the most critical risks.
You can do this by categorizing the risks in a three-part scale that includes ‘High, Medium, and Low’ or you can rate them on a scale of 1 to 5.
Classify your risks based on the parameter and focus on the ones that are a priority. This includes:
- High probability and high impact: These risks are notorious and must be the number one priority of your mitigation plan.
- High probability and low impact: These are standard risks and they also require mitigation plans due to their high frequency, however, its impact is low and therefore manageable.
- Low probability and high impact: The chances of these risks occurring are close to zero. But if they do occur, they will have a massive impact on your operations. To be safe, there must be a mitigation plan in place, however, prevention is better than cure.
- Low probability and low impact: These risks cause very minimal damage and are unlikely to happen. Therefore are considered insignificant and are not the focus of mitigation plans.
Step 4. Plan Mitigation of the Risks
Now that you’re aware of the dangers, what should you do?
You must decide how you want to tackle them. Risk assessment and prioritization strategies use expert judgment to identify possible implications, specify inputs, and evaluate data.
Risks may be dealt with in a variety of ways. Here are a few ways to help mitigate risks successfully:
- Acceptance: This risk is manageable, and the organization feels capable of overcoming it.
- Reduction: When there is a significant danger, the firm would take up efforts to mitigate it as soon as possible.
- Prevention: Doing everything possible to ensure that the risk cannot take place or to not encounter the risk at all. This is advisable for the high impact risks.
- Sharing: Multiple teams or organizations in the firm may be responsible for handling this risk in case it arises.
- Correction: Trying to find the risks before too much damage has been done and signaling early to minimize the impact.
- Warning: Focusing on detecting the risk as early as possible.
Given the inevitability of hazards, having a risk assessment matrix on hand will definitely aid project management for all stakeholders.
Internally: Distribute a risk assessment matrix to your technical team members so that they may predict problems before they occur and share risk management tasks in whatever plan has been decided, established, and disclosed.
Externally: You could use a risk assessment matrix to describe potential challenges and prepare to avoid them while managing projects for customers or business partners, giving your clients or partners the ease of mind to rely on your team to complete the project.
Step 5. Review and Update
Finally, it is important to remember that the risk assessment matrix is a dynamic, ever-changing document that requires care and attention.
Risks are present in every aspect of our lives, and the matrix should stand testament to this. Various triggers, such as enterprise risk management (ERM) program, a big merger or acquisition, or a serious vulnerability within your internal controls system could push for the need for a refreshing change or update.
Therefore, the risk assessment procedure should be repeated several times a year to make sure that is in good shape. It must be updated on a regular basis to reflect changes in your company’s risk environment.
There will always be situations that can not be completely avoided and in those circumstances, it is best to be aware of the risks you may face so you are able to make decisions accordingly.
With a risk assessment matrix, you will have a clear overview of all the risks and their severity and create plans of action that can help minimize all risks and setbacks faced by your business.
We hope that this blog has done its part in educating you about a risk assessment matrix and how to create it.
Now all you have to do is roll up your sleeve and get right into creating one and nothing will be able to catch you off guard! Hope for the best and prepare for the worst. Good luck!
Mitigation Plan: What Is It & How To Create One?
Information Security Plan: What is it & How to Create it?
Crisis Management Plan: Definition, Types & Steps to Create!
9 Risk Management Tools & Techniques You Must Try!
Contingency Plan: Definition, Importance & Format!
RAID Log: What is it and How to create one? (Steps Included)
Bit.ai is the essential next-gen workplace and document collaboration platform. that helps teams share knowledge by connecting any type of digital content. With this intuitive, cloud-based solution, anyone can work visually and collaborate in real-time while creating internal notes, team projects, knowledge bases, client-facing content, and more.
The smartest online Google Docs and Word alternative, Bit.ai is used in over 100 countries by professionals everywhere, from IT teams creating internal documentation and knowledge bases, to sales and marketing teams sharing client materials and client portals.
👉👉Click Here to Check out Bit.ai.