Nonprofit organisations that strive for positive change are also susceptible to risks. From fraud and non-compliance to the destruction of physical assets, risk can damage your financial security and hurt your reputation. This possibility of losing funds is referred to as financial risk.
A global study found that nonprofits represented 9% of fraud cases, a type of financial risk, and the average loss was $639,000.
To effectively deal with such financial pitfalls, nonprofits need to plan for them. A financial risk plan is a series of actions and policies laid down to tackle the different possibilities of financial risks. .
Let’s begin by talking about the different financial risks that can face charitable organisations.
What financial risks do nonprofit organisations face?
1. Misuse of funds and poor investments
Nonprofits can lose a great deal of money and resources to indiscrete spending. While the funds might be spent on just causes such as carrying out the organisations’ charitable roles, creating awareness or hosting events, there’s the possibility of exceeding the budget.
Similarly, the resources could be spent on events that are neither related to nor help move the needle in terms of the organisation’s goals.
Much like their for-profit counterparts, nonprofits face the danger of making poor investment choices. The venture could either go wrong or even be a sham from the onset. The investment could lose value and the organisation could lose support and goodwill.
2. Poor financial reporting
Non-profits might fail to properly track and report their expenses. With a flawed idea of their revenue, inaccurate budgets and reckless spending become possible. Also, it’s hard to uncover any loopholes in financial planning.
3. Fraud
Fraud typically involves deceit with the intention to illegally or unethically gain at the expense of another. Financial fraud is one of the most common financial risks faced by nonprofits; these charitable organisations are sometimes more vulnerable due to lower security standards and the lack of the necessary resources to avoid malicious activity.
Nonprofits can also fall victim to other types of fraud, such as fundraising scams or vendor fraud.
4. Collaboration issues
Another financial risk that charitable organisations face is one which might stem from their association with other entities. If their partner is involved in a scandal or is incompetent, it might damage the nonprofit’s image and cost the organisation money and resources.
5. Tax issues and non-compliance with regulatory requirements
Charitable organisations don’t have the same tax responsibilities as for-profit companies. However, tax compliance for nonprofits can be a heavy burden, and the tax-exempt status they enjoy could be revoked for any reason. Failing to pay any necessary taxes can expose an organisation to losses, financial and otherwise, in the form of fines.
Additionally, there might be legal requirements to ensure the transparency of nonprofits. Failure to file the necessary documents in compliance with these requirements typically results in fines.
6. Destruction of physical assets
Non-profits usually own physical assets such as office buildings, furniture, computers, warehouses, vehicles, educational centres and even farmlands. There’s a financial risk attached to owning such assets because they’re subject to damage. Damage necessitates repair; repair costs money.
How nonprofits can plan for financial risks
Here are the steps to create a financial risk plan for your nonprofit.
1. Identify potential financial risks
In the famous words of the boxing legend Muhammad Ali, your hands can’t hit what your eyes can’t see.
The first item on the nonprofit financial risk management checklist is to pinpoint the financial risks that your organisation faces. Without ascertaining the threats that can confront your charitable organisation, it’s difficult, if not impossible, to know your weaknesses or prepare adequately.
Finding out the possible financial pitfalls facing your nonprofit calls for a profound examination of your organisation and its methods on the one hand and a deep study of the various financial risks on the other hand. Side-by-side scrutiny of both exposes the weaknesses of your nonprofit and gives a good idea of areas that need attention.
2. Engage in risk assessment
Strategic financial planning for nonprofits demands that you analyse the risks your organisation is susceptible to ahead of time. Of course, you hope you never these dreadful events never come to pass, and the simple act of planning for them can help mitigate the possibility of risk.
It’s important to rank the various risks and engage in scenario planning. A risk management grid can help arrange them in the order of which you want to avoid the most or in the order of which poses a high risk. You could also employ a rating system that scales the risks from most likely to least likely.
Scenario planning demonstrates the likelihood of each financial danger and the possible loss in terms of your nonprofit’s exposed assets.
When engaging in risk assessment, it’s crucial to note
- The impact the financial risk could have on your organisation
- How to prevent the various risks
- The difficulty of preventing each risk
- How to reduce the ravaging effect of each risk if it occurs
- Resources necessary if your nonprofit falls victim
The risk assessment process gives you a good overview of your organisation and any of its potential risks.
3. Prepare to deal with the various risks
After the risk analysis, gear up to deal with the different financial risks. Due to the variety of these risks, the methods necessary to tackle them are equally different. Let’s consider these various methods.
Documentation of procedure: The policies regulating your organisation’s financial matters should be written down. Such materials should be distributed organisation-wide to keep the entire team informed. Also, it should be revisited frequently to effect the necessary changes.
Financial control: A surefire way to scale many of the financial pitfalls is by establishing control. This can be achieved by implementing proven accounting and payment practices. Checks and balances such as the need for multiple signatures, invoice reviews and approval thresholds, to name a few, will cut down on the possibility of financial losses.
Supervision: Constant assessment of the organisation’s processes is a must. Frequent appraisal in the form of risk reviews and audits will determine the efficacy of the methods used.
Legal review: Your nonprofit should have a legal team and they need to be involved in the organisation’s dealings. Besides giving legal advice, their role includes doing the due diligence for your organisation.
Emergency cash reserves: The physical assets that nonprofits own are prone to damage. Other commitments such as the payment of employees’ salaries and the continuation of charitable work are there even if the organisation loses funds. Cash is an option to take care of these concerns.
Insurance: Things could go wrong no matter how well you prepare. Planning for financial risk involves taking this reality into account. Insurance can help your nonprofit deal with claims in the event of any damage. General liability insurance and property insurance are some of the coverages popular among charitable organisations.
4. Work with a strong team and implement technology
Sometimes, the success of a financial sustainability plan for your nonprofit is dependent on the staff. It pays to have the right hands working in a charitable organisation when keeping risk at bay is a concern. You should have employees that are aware of the dangers and also possess knowledge of how to deal with the said risks.
Prioritise constant training of your employees to keep them informed. Emphasise collaboration on the organisation’s processes to boost the chances of spotting loopholes. Engaging external experts such as accountants and auditors might also help if you do not have them in-house.
Technology is indispensable in safeguarding your organisation’s finances. Various tools help with this aspect of risk management. Whether software that predicts budgeting outcomes or those that manage data, these tools automate and streamline the process.
5. Stay vigilant
The truth about financial risks is that they never really vanish permanently. Dealing with them shouldn’t stop either! Keep up to date on how any potential threats are evolving and continue evaluating your organisation’s processes to spot any chink in the armour. This will help you polish your plan over time.
Planning for financial risk helps your nonprofit safeguard your funds and preserve your reputation and goodwill. Implementing these practices will strengthen your financial security, allowing you to do good.
