The Role of Risk Matrix in Risk Management

The risk matrix is ​​one of the key tools for management, control and decision-making in companies. Before detailing each of the elements that you can see, analyze and monitor in a solid risk matrix, in addition to probability and impact, let us remember some of the fundamental concepts for risk management. It is important to understand because these risk matrices can be very useful for risk managers and can help protect the organization’s risk management framework in many situations. 

According to the ISO 31000 standard, risk is understood as "the effect of uncertainty on objectives", that is, as the possibility of something happening that changes an objective. Thus, when we talk about risk, the following points must be considered: 

Threats or sources of danger: Everything that can cause something to happen at any time that alters or modifies the objective. 

Trigger: It is what allows an event to occur when sources of risk or danger come into contact. 

Event or event: When the materialization of the risk occurs. 

Impact: Consequences that a risk generates when it occurs. 

Bearing this in mind, remember that all companies, regardless of their size or industry, are exposed to different types of risks (compliance, strategic, operational, financial, information security, among others) that if not identified, managed and controlled in an adequate way they can not only generate economic effects but also in the sustainability and continuity of the businesses. 

Therefore, it is important to prepare a risk matrix that allows you to make an objective diagnosis of the different risk factors to which they are exposed in your organization and, likewise, prioritize them in order to make decisions that serve to manage and control them. In Pirani you will find different solutions that will help you make this management easier, learn about them here. 

What is a risk matrix for? 

The first thing to keep in mind is that a risk matrix, in addition to allowing you to locate risks by referencing the probabilities of occurrence and impacts on the business, helps you to see, analyze and monitor other elements:  

1. Risk level: It is the magnitude that results when combining the probability and the impact of a risk, suppose that in your company a credit risk is identified among its risks, which is the possibility that a supplier does not receive the payment of a loan or that it does it outside the established time, and they determine that the probability of this happening is 3 and that its impact is also 3. Thus, by multiplying these two elements, the level of this risk for the company is of 9, this is what allows you to identify the quadrant in which the risk will be located for its life cycle and according to the defined criteria you will be able to know if it is critical or not.  

2. Risk criteria: This allows you to evaluate the importance of the different risks identified in your company. To determine these criteria, you must consider the objectives of the organization, as well as the internal and external context in which it operates, therefore, they are not standard criteria for all companies. 

3. Risk appetite: Amount of risk that your company is willing to take to achieve its objectives, in other words, how much of a certain risk it accepts. 

4. Risk tolerance: It is defined as the exposure limits of your company's risks over time. In the matrix you can see what is between the green and red areas. 

Being clear about each of these elements and knowing how to analyze and monitor them is what will allow you to do good risk management because as you can see, in this matrix, which must be flexible, clear and easy to read, you will find everything you need to take decisions that help you face each of these in order to meet the objectives of your company. 

Creating a Digital Risk Matrix