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.