In any organization, you will encounter risks that may prevent you from getting to where you want to go, and it can be difficult to keep track of them and what to do about them. These risks can be strategic or operational. For example, if you’re in the manufacturing sector, your risks could be the breakdown of a critical machine; a disruption in the timely receipt of raw materials; or the diminished reputation of your product quality due to the actions of a downstream customer.

To contextualize and make sense of risks, it helps to develop a risk matrix, which is a graphical tool on which risks can be plotted (image courtesy of https://www.microtool.de/en/knowledge-base/what-is-a-risk-matrix/).

On one axis of the matrix, you’ll have the likelihood of a risk event occurring, while the potential impact of the event is on the other axis. Each axis can have intervals from one to five, and after some discussion with your team, you can score each potential risk event from one to five on each axis. The matrix can also be broken into sections, which will help guide how you respond to each risk event. Referring to the matrix above, any risk that falls in the red region needs to be eliminated or mitigated immediately (this would be a risk that puts the existence of the organization in danger). An example of this type of risk would be a successful lawsuit against the organization with an award that would result in bankruptcy.

Risks that fall in the yellow region are ones that would result in significant costs, but not necessarily fatal to the enterprise, and should be mitigated or hedged in some way. An example of this type of risk would be a supply chain disruption that prohibits a manufacturer from delivering a critical product to a customer, resulting in a tarnished reputation. Any risks that fall in the green zone are risks that should be monitored, but don’t warrant urgent action. An example of this risk would be rain falling on a scheduled outdoor event, in which case the risk could be substantially mitigated by planning a rain date for the event.