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Why All Nonprofits Should Periodically Assess Their Risk

5/12/21 – Stephanie Allgeyer

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Nonprofits have at least one thing in common with for-profits: Only the strong survive. The nonprofit sector is extremely competitive and even a relatively small shift of fortunes can threaten an organization's future. With events such as the death of a major donor or the loss of grants, organizations turn to their leaders to minimize the damage and restore stability. But all too often, there is no plan in place to tackle risks.

Astute nonprofit leaders do not wait for a storm. By conducting a risk analysis and confronting the possibilities ahead of time, they prepare their organization to weather rough times. On the surface, the practice of risk assessments may appear to be an exercise for larger organizations, but the consideration of risk, scalable to every organization, is vital to success – success for your mission, your employees and the community that is supported by your organization.

Alarming Assessments

The nonprofit consultancy's Nonprofit Sector Leadership Report, a survey of 1,000 nonprofit leaders, staff members, directors and volunteers, found that 77% of respondents said their groups had no leadership plan or program in place. In addition, 49% said they were operating without any knowledge of or access to a strategic plan.

These are troubling statistics for a sector that is particularly fragile. How fragile? Here are a few examples:

  • An organization built on one income stream can crumble quickly if a grant or a government contract is canceled.
  • A group depending on one donor, or a small group of donors, can tumble if the donor leaves or passes away, or the contributors find a more attractive option.
  • An organization that ignores the wishes of major donors or, takes a direction unpopular among donors, risks losing contributions as supporters identify causes they find more compatible with their worldview.
  • A group hit by a scandal, such as funds misappropriated by an executive or a marital scandal, may find that public opinion quickly shifts and donations erode.
  • The loss or departure of a community trusted Executive Director – the individual who is possibly the one known face of the entity.

Gauging the Risks

The question, then, is how can you shore up your group? The first step is to become more strategic in examining your business model. Leaders and staff should develop a solid understanding of the group's dynamics: How do all areas of operation interrelate and affect the organization's mission? How can you maximize benefits without unduly jeopardizing the organization?

Identifying the main threats and developing strategies to abate them is critical for both the survival of the organization and the well-being of those it serves.

In 2015, the Federation Employment and Guidance Service (FEGS), which had an annual operating budget of about $250 million, filed for bankruptcy and closed its doors. As a result, 1,900 people were out of work, creditors were left holding more than $47 million in debt, and 120,000 households who relied on the supplier of mental health, disability, housing, home care and employment services in New York, had to be transferred.

"Facing a Crisis"

Soon after, the Human Services Council released a report calling for urgent reforms to prevent a looming crisis in the nonprofit sector. The 45-page report, titled New York Nonprofits in the Aftermath of FEGS: A CALL TO ACTION, suggested that the nonprofit sector itself wouldn't survive without fundamental changes in reimbursement models and regulatory burdens. It concluded that the failure of FEGS was symptomatic of "a sector facing a crisis."

The report made eight recommendations, including: reducing regulations, increasing reimbursement and warning providers to be more responsible and avoid city or state contracts that do not pay the full cost of services.

Similarly, in early 2017, the Open Road Alliance, a private initiative that provides grant capital, published a toolkit to promote best practices of risk management. The alliance pointed out four steps to take:

1. Risk assessment. Identify, evaluate and prioritize risks based on likelihood and potential consequence.

2. Risk mitigation. Determine and take steps to manage identified risks.

3. Contingency planning. Develop alternative plans in the event that the unexpected happens.

4. Risk monitoring. Determine methods to actively monitor new and known risks as they arise.

Addressing the Threats

As a result of these best practices, along with similar reports and recommendations, leaders in the nonprofit sector are starting to change their perspectives from reactive to proactive. For example:

  • Managers, directors and staff are working together to identify and monitor risk.
  • Boards are shifting their focus from fiduciary responsibilities to confronting risks relating to the organization's mission and strategic direction.
  • Staff are providing context and valuable data.

Reminder: Although this is a team effort, the organization will be taking its cue from its leaders. At its core, risk management is a security measure that should be incorporated into daily activities. As uncertainty continues and new threats emerge, the ability to engage in viable strategies becomes more important than ever. With that in mind, here are four practical suggestions for embracing this approach.

1. Establish a committee to develop a risk management program. This might include people from diverse areas of the nonprofit such as employees in administration and operations, finance and programming, as well as volunteers.

2. Identify the most crucial situations where risk is most likely to impact the organization. For example, a "top ten list" might include loss of grants, naïve crisis planning, poorly understood or managed donor relationships and lack of practical governance practices.

3. Determine how likely each threat is to occur.

4. Set priorities so the most important items can be addressed first.

Creating this blueprint will help build awareness in respect to the numerous aspects that should be monitored. It enables the organization to identify where and when it is most vulnerable.

Act Before Threats Rear Up

It is up to leadership to assess the potential effect of each identified risk. Follow up by mitigating the most urgent threats. Protect your organization by acting before its survival is threatened.

For questions related to risk management or nonprofit guidance in general, contact VonLehman’s Nonprofit Group Leader, Stephanie Allgeyer, at sallgeyer@vlcpa.com or 800.887.0437.