What Your Nonprofit Board Needs to Know About Risk Management

Proactively engaging your board can help mitigate common financial risks and prepare your organization for risks that may be hiding in the weeds. 

Your board of directors may not be leading your nonprofit, but they all need to be on board, so to speak, with strategic financial planning and execution. The board has a fiduciary duty to ensure that the nonprofit’s assets are used wisely and in accordance with best practices.

A nonprofit will confront potential risks ranging from compliance and regulations to cyber-security to political and lobbying risks and more. But dealing with financial risks, which encompass a wide range of potential problems, is one you absolutely, fundamentally need to resolve with unanimous support of your board.

Proactively engaging your management team and your board will help mitigate many of the more common financial risks and make your organization far more prepared to face those risks which are hiding in the weeds.

Five important questions you and your board need to be able to answer

1. What are your financial risks?
Is your organization aware of events or issues that could significantly hamper or even stop your nonprofit’s ability to perform your mission? Any numbers of problems can arise at any time for a variety of reasons. You need to assess and document those issues might entail and the conditions in which they could occur.

2. How does your nonprofit measure and prioritize financial risk?
This hinges on your ability to understand the probability of a financial issue happening. Additionally, your organization should understand the potential for financial, reputational, and other damages should an issue occur. Which of those possibilities will hurt the organization the most? Once you know where the real hurt may come from, you can put resources where they will provide the most benefit.

3. How serious are those risks? 
Now that you have prioritized financial risks by understanding the probability for potential damage, you will have a sound basis to articulate the specific level of financial cost to the organization. But you should not stop there. Your organization also needs to understand how serious those risks would be in terms of their impact on your public relations, ongoing public support, and stability of funding for your core supporters.

4. What can you do to mitigate risk?
This is the planning stage where you design the guardrails that can protect your organization from serious harm. Even seemingly simple details such as how cash is handled can create the need for a well-defined, clear policy that will avoid future problems. This can include:

  • Avoidance — Eliminating any conditions that create risk
  • Reduction/Mitigation — Minimizing the probability of risk and its potential impact
  • Transferring risk — Employing insurance or sharing with a joint venture
  • Acceptance — Take no action to respond

 

5. Finally, who is accountable for implementing a risk management plan?
Management and the board have ultimate responsibility for the financial health of the organization. But who will be accountable for making certain that the risk management plan is carried out? Here is where creating a team comprised of management, staff, and even volunteers can help you ensure a commitment to implementing a sound risk management plan. This hand-picked team can then report on how the plan is working and where changes or adjustments need to be made.

All the above needs to be done with the knowledge and support of the board of directors. That includes helping the board understand the types of financial risk you may face and what their role may need to be.

What kind of financial risks might the organization face?

Make sure the board understands these ten fundamental areas of risk.

1. Fraud and Theft
This can include burglary of nonprofit assets; swindling the nonprofit using false pretenses; forgery; and embezzlement.

2. Investment Risks 
Every nonprofit need to actively monitor and control its investments, regardless of how large or small the investment fund may be.

3. Misuse of Funds 
Many nonprofits receive gifts or donations or funding that come with specific restrictions or limitations on what they can be used for. Improper use can cause the donor or funder to withdraw the money, require repayment, and refuse to provide future funding.

4. Tax Liabilities 
If you’ve paid appropriate Social Security, FICA, state and federal income taxes, you’ve avoided risk. However, you need to also understand if your organization is responsible for charging and then remitting sales tax on any items sold. Unrelated business income, such as accepting advertising in newsletters or other publications, can also be taxable. Be sure your nonprofit has a clear understanding of its tax obligations.

5. Tax-Exempt Status 
If your nonprofit uses funds for any reason not related to your stated charitable purpose, the nonprofit could lose its exempt status. You could also lose tax emption status for private inurement (devoting funds to private uses). Nonprofits are also specifically restricted when it comes to political active. Acting outside of those restrictions will also put your tax-exempt status at risk.

6. Failure to Report or Inaccurate Financial Reporting 
This can result in ineffective or at least ill-informed decision making. It will also harm your reputation and reduce credibility among key stakeholders and large funders.

7. Failure to Budget or Plan Responsibly 
Budgeting is essential to setting a benchmark and evaluating the financial health of a nonprofit. Failure to do so can result in as much damage as the failure to report accurately.

8. Fundraising 
Some nonprofits have discovered that fictitious groups claim to raise funds on their behalf. The organization never receives any of the money which damages both the financial status of the nonprofit along with their reputation. This becomes a legal, financial, and public relations headache that will need a swift planned response.

9. Sponsors and Cause-Related Marketing Partners 
Nonprofits need to carefully evaluate potential sponsors and partners to ensure that they choose the best possible partners to avoid financial losses as well as public relations disasters.

10. Physical Assets and Cybersecurity 
This is essentially about making sure all physical assets — furniture, fixtures, equipment, office supplies, artwork— are properly insured against fire or flood, and damage done by employees, volunteers, hackers, or anyone else wanting to harm the organization for any reason. Some nonprofits may also have supplies warehoused for food banks, sports organizations, or mentoring programs. These need to be covered as well.

Take advantage of opportunities

Risk cannot always be avoided. Nor should it be. Some risk comes with leveraging opportunities. Any organization that is focused on moving forward cannot succeed by being entirely risk averse; it needs to challenge itself to consider the benefits of taking on risk, provided it’s managed and controlled.

If the organization can eliminate as much uncertainty as possible, find ways to increase the probability of a positive outcome, or even share some of the responsibility with a third party, it can mitigate much of the risk and reap the benefits of the opportunity. Developing and adhering to a sound investment policy is a great example of leveraging available cash into a potentially more lucrative return for the nonprofit.

How to assess organizational risk

As mentioned before, you need to prioritize risk—which ones are most likely to occur, and which ones would have the largest impact on your organization. You can even create a “heat map” to chart how risk should be ranked.

How to create your risk management plan 

The Nonprofit Risk Management Center offers a self-directed risk assessment tool that guides you through a series of questions about your risk management process and specific risks your nonprofit faces. It also includes a risk ranking function that allows you to prioritize risks. The tool offers advice based on your self-assessment that results in a customized report and executive summary.

Consider using an online portal, like the one offered by BoardEffect, to provide a secure online board repository where you can safely store founding documents, board policies, and your risk management plan so they are easily accessible to responsible teams or board members.

One last item: make sure you commit to regularly scheduling a review of the plan and update when necessary.

To learn more, talk with All In One Accounting 

Our experts can work with you to determine your risk profile and design a risk management plan to help your nonprofit stay fiscally sound and secure. If you have questions about nonprofit financial issues, please contact us at hello@allinoneaccounting.com.

 

 

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