“Life is inherently risky. There is only one big risk you should avoid at all costs, and that is the risk of doing nothing.” This quote from motivational psychologist Denis Waitley captures our view on risk management.
Life—and business—is filled with risks. Both for-profit and non-profit organizations face risks every day.
Nonprofits face specific risks. The smart ones face these risks head-on, examining them from all angles and discussing risk mitigation strategies. Let’s look at five common risks nonprofits face and how thriving nonprofits address them.
Five Common Risks Faced by Nonprofits
Risks are categorized as internal or external. Internal risks are those that an organization faces from within, while external risks are those from outside the organization. We have selected five as representative examples for this article, but there are many, many more. Blackbaud has a longer piece on risks that may be worth reading if you’re curious about other risks organizations face.
Common risks nonprofits face every day include:
- Expense management (internal): Expense and cash flow management are critical to long-term success. Nonprofits with shaky accounting practices or the wrong technology supporting their accounting and financial analysis may find themselves struggling to maintain the margins they need to support their mission.
- Compliance (internal): Compliance with fund accounting best practices and nonprofit accounting guidelines is essential. Strict adherence to government, reporting, and fundraising laws is required. Failing to do so can result in the loss of tax-exempt status.
- Cybersecurity (internal): Cybersecurity threats have grown more sophisticated and frequent with the advent of AI, which makes it easier for criminals to attack at scale. Both external attacks and phishing expeditions are common, and nonprofits are a particularly appealing target for criminals. Most nonprofits have limited resources to address cybercrime and attacks, and criminals exploit this.
- Public perception (external): Nonprofits risk losing public goodwill due to marketing missteps and operational mistakes. For example, some nonprofits came under fire several years ago when their overhead costs seemed excessive to the public. Retaining public goodwill is crucial for success.
- Government changes (external): Each administration brings its own approach and direction to various issues, and this approach impacts funding. Whether you run a nonprofit dedicated to education, healthcare, environmental issues, or another cause, changes in funding availability that are dependent on legislation are always a risk.
How Nonprofits Prepare: A Risk Mitigation Plan
Life is risky – and so is business. How do thriving nonprofits prepare a risk mitigation plan that actually prepares for the worst but hopes for the best?
Preparedness is key to mitigating risk. Organizations that prepare, to the best of their ability, for potential risks are those that are in a better position to navigate the future. Such organizations take the following steps to prepare:
- Acknowledge the risks: Organizations should conduct risk assessments in all key areas, and work with other professionals, such as their auditing or accounting firm, insurance agent, and the like, to discuss possible risks and ways to offset them.
- Engage all stakeholders: Ask senior leaders to participate in this exercise.
- Conduct what-if scenarios: Discuss what-if scenarios and consider tabletop exercises, which allow participants to discuss and go through various scenarios for disaster planning. Go through potential situations and how to handle them as a team.
- Write emergency plans: Write down emergency plans and prepared responses after conducting what-if scenarios. Train your team on the plans too. Don’t just put them in a binder or computer file. Make sure everyone knows where they are and how to access them if needed.
- Review annually: Risk planning isn’t once and done. Review plans periodically to keep them fresh.
Risks Can Also Mean Rewards
One last thought about risk. Risk can also mean reward. Not all risks represent threats to be avoided. Sometimes there is a reward in taking a risk. There are healthy risks, such as exploring new service opportunities or expanding into new areas. Being completely “risk-averse ” may also close you off to new opportunities.
With benefit-associated risks, organizations should conduct full due diligence. Exploring all possible scenarios (not just the positive ones) is a balanced way to approach business risk.
Life brings risks. Some risks offer rewards, and some should be mitigated. By exploring possible business risks and planning ahead of time on how to manage them, nonprofits can remain healthy and operational in the event a risk becomes reality.
Welter Consulting
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.
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