For businesses, risks can significantly impact operations and profitability, making risk management a critical consideration. So what’s the best place to start?
A risk assessment matrix will help you identify, assess, and analyse risks so that you can manage them before they happen. This will save your company money, time, and resources.
In this blog, we’ll look closer at the risk assessment matrix, exploring how it works and the steps involved in creating one.
Next Read: Learn more from our introductory guide to risk assessment in the workplace.
- What is a Risk Assessment Matrix?
- How does a Risk Assessment Matrix Work?
- Download a FREE Risk Assessment Matrix Template
- Why is a Risk Matrix Important?
- Steps to Develop a Risk Assessment Matrix
- Possible Risks to Avoid
- Limitations of using a Risk Assessment Matrix
- Prioritise Potential Risks and Take Action
- Other Matrices to Help Your Business Grow
What is a Risk Assessment Matrix?
A risk assessment matrix is a tool to identify, analyse, and evaluate potential issues associated with a project or activity. It is commonly used in project management to help identify and prioritise risks and determine appropriate risk response strategies.
The matrix is usually presented as a two-dimensional table, plotting the likelihood and consequences of a particular risk event on the axes.
Deloitte’s report states that over 60% of projects are late, over budget, or fail to deliver to specifications, highlighting the importance of risk management.
A risk matrix can help a project manager identify project risks impacting its scope, budget, timeline, and resources. Then, they can develop appropriate risk response strategies to mitigate or address these risks.
With proactive project risk management, project managers can increase the likelihood of project success and avoid costly delays and overruns.
How does a Risk Assessment Matrix works?
A risk assessment matrix presents risks on a chart with colour codes that indicate severity, ranging from high to low.
Two axes measure likelihood and impact. Likelihood is based on the chance of an event occurring. The level of impact refers to how negatively the business or project will be affected by the event taking place. Insignificant impacts may cause negligible damage, while catastrophic impacts can result in serious effects on business operations.
Companies typically use five categories to assess the probability of a risk event:
- Highly Likely: This category includes project risks that are almost certain to occur, with a probability of 91 per cent or more.
- Likely: Risks in this category have a probability of 61-90 per cent and are likely to occur repeatedly, requiring consistent attention and mitigation strategy.
- Possible: Risks in this category have a probability of 41-60 per cent and may happen about half of the time. They require attention to avoid negative consequences.
- Unlikely: This category includes risks with a low probability of occurring, between 11-40 per cent. Even though they are less likely to occur, monitoring them to prevent any negative impacts is still important.
- Highly Unlikely: Risks in this category have a probability of less than 10 per cent and are highly unlikely to occur. It’s still important to map out these risks so that management is aware of them, even if they are not going to be a main priority.
Download a FREE Risk Assessment Matrix Template
Assessing risk is arguably one of the most important functions of a business, but without a reliable risk assessment matrix, it can often be difficult to do so. Creating one yourself can take a lot of time, leaving you exposed to risks in the meanwhile. Try our free downloadable risk assessment matrix to quickly get ahead of the curve. With just a click of a button, you can be assessing risks in a reliable manner today.
Why is a Risk Matrix Important?
2020 demonstrated that business risks are becoming increasingly significant and intricate. Adopting a risk matrix can enable companies to comprehend the risk environment better and handle risks proactively in project management.
KPMG’s report, Internal Audit: Key risk areas for 2021, states that the COVID-19 pandemic, exceptional natural calamities, and worldwide civil turmoil have created a new normal, which will influence businesses for a prolonged period.
Therefore, companies must acknowledge and tackle present and future challenges by promptly identifying, evaluating, and mitigating risks through assessment training methods and tools. Benefits of a risk assessment matrix:
1. Prioritising risks
The risk assessment matrix evaluates and quantifies the likelihood and impact of each risk. It helps organisations identify the most significant risks that must be addressed first. This enables them to allocate their resources effectively and efficiently to manage the risks that are most critical and minimise the potential impact of those risks.
Risk assessment matrices serve as documentation that are a useful reference for stakeholders to understand risk exposure.
The risk assessment matrix enables organisations to make informed decisions for successful risk management. It provides a systematic and objective approach to evaluating risks and their potential impact on the organisation.
You can use the information to make informed decisions about:
- Which risks to address
- Which mitigation strategies to implement
- The resources required to manage the risks effectively
4. Continuous improvement
As organisations evolve, so do their risks. By regularly reviewing and updating the risk matrix, organisations can identify new risks or changes in existing risks, prioritise them, and develop new mitigation strategies. This helps organisations avoid potential risks and continuously improve their risk management processes.
Steps to Develop a Risk Assessment Matrix
Developing a risk assessment matrix involves four key steps:
1. Identifying Risks
The first step in developing a risk assessment matrix is identifying potential risks. This can be done by reviewing previous incidents or near-misses, consulting with subject matter experts, conducting a site or process analysis, or using other risk analysis tools. The identified risks should be specific and relevant to the area of concern.
Let’s categorize risks based on different criteria:
- Strategic Risk: Risks that arise due to failed business decisions, such as entering a new market, launching a new product, or investing in new technology.
- Operational Risk: These risks occur when there are breakdowns in internal processes or procedures, such as human errors, system failures, or supply chain disruptions.
- Financial Risk: Different risks associated with financial loss, such as market fluctuations, credit defaults, or currency exchange rate fluctuations.
- External Risk: Risks beyond the control of the organization and stem from uncontrollable, non-human sources, such as natural disasters, pandemics, or political instability.
2. Determining Risk Likelihood and Severity
Once you identify risks based on a risk analysis, the next step is determining their likelihood and severity.
- The likelihood is the probability of the risk occurring;
- Severity indicates the potential impact or consequences of the risk.
This step typically involves gathering data, such as incident reports, historical data, or expert opinions, to assess the likelihood and severity of each identified risk.
3. Assigning Risk Scores
Risk scores are assigned based on the likelihood and severity of each identified risk. A common approach is to use a numerical scale, such as 1-5 or 1-10, to rate the likelihood and severity of each risk.
Many organisations utilise a three-level scale to evaluate the severity of a situation. The risk levels on this scale include:
- High Risks
- Moderate Risks
- Low Risks
The risk score is calculated by multiplying the likelihood score by the severity score. This step provides a quantitative measure of the risk and helps prioritise risks for further action.
4. Prioritising & Mapping the Risks
The final step in developing a risk matrix is actually mapping the identified risks. This is typically done by sorting the risks based on their risk scores, with higher risk scores indicating higher priority risks.
Prioritisation can also consider other factors, such as the potential consequences of the risk or the resources available for managing risks. This step helps focus resources and attention on the most critical risks.
Possible Risks to Avoid:
Here are some specific risk scenarios that could be important to your business environment:
- Manual handling hazards and injuries to avoid
- Manual handling hazards in aged care
- Risk assessment when working at height
- How to identify skill gaps in the workplace
Limitations of Using a Risk Assessment Matrix
There are several limitations associated with using a risk matrix, including:
- Subjectivity: Risk matrices require human input, which means that it can be subject to error. Human error can be minimized by ensuring that all parties involved understand the process and are well-versed in their area(s) of expertise. Additionally, consulting multiple people helps ensure a more unbiased approach.
- Overreliance: Because it’s easy to use and readily available, many people rely too heavily on their risk matrices when assessing risks. If there are shortcomings in the risk matrix, threads can be missed or incorrectly planned for. They are meant to be guides, not the only source of risk identification.
- Difficulty quantifying risks: It can be difficult to quantify risks in some cases since they’re often subjective or uncertain by nature. This could result in significant risks not being focused on enough or insignificant risks not receiving enough attention. This is why continuously checking and updating your company’s risk matrices is important.
Prioritise Potential Risks and Take Action
The risk assessment matrix is essential to helping organisations prioritise and take appropriate actions to mitigate risks.
However, the risk assessment process can be complex, requiring a thorough understanding of:
- The business environment
- Industry standards
- Regulatory requirements
Therefore, organisations must provide their employees with proper risk assessment training.
At Cloud Assess, we understand the importance of risk assessment in achieving business success. We offer comprehensive risk assessment training programmes to help your employees identify, analyse, and prioritise risks to your organisation.
So if you’re looking to improve your risk management practises and protect your organisation from potential threats, contact us today and learn how we can help you with risk assessment training.
Other Matrices to Help Your Business Grow
Matrices are useful resources that can help your business avoid risk and improve day-to-day operations. At Cloud Assess, we have created a comprehensive collection of different matrices that you can implement. Check them out here: