How To Reduce Financial Risk for Your Nonprofit
Many nonprofits walk a razor-edge financially. Nonprofits address society’s most difficult issues, compete for limited funding and struggle to find and keep qualified staff to run their organization. A new report by Oliver Wyman, SeaChange Capital Partners, and GuideStar, which examines the finances of more than 219,000 U.S. nonprofits, reveals sobering realities:
- Around 50% have less than one month of cash reserves
- Some 30% have lost money over three years
- Some 7-8% are technically insolvent
A structural approach to financial risk management
Sadly, when a nonprofit organization faces financial hardships, it creates hardships for some of society’s most vulnerable and fragile people. That’s why financial risk management for nonprofits is so critical. The Oliver Wyman/SeaChange Capital Partners report provides a holistic risk management framework that encompasses all levels of a nonprofit organization:
- Develop a risk appetite statement, as guided by your organization’s audit and/or finance committees. Similar to a mission or vision statement, this indicates the appetite to take on major risks facing your nonprofit and to trade short-term programmatic impact for long-term sustainability.
- Recruit qualified trustees who can who can ask difficult questions about risk yet understand the complex financial and operational challenges of your nonprofit.
- Take the longer view. Awareness of the longer-term trends in your operating environment is critical. You’ll be in a better position to take strategic actions, such as collaborations or mergers, and to understand the implications for your organization’s financial health.
- Provide reporting and disclosure. To better present the nuances of your nonprofit’s financial health to stakeholders, be prepared to summarize financial and programmatic results clearly and succinctly.
- Engage in scenario planning. Your organization should keep a running list of its risks. For each of these, indicate the likelihood and expected loss in terms of unrestricted net assets. Also, consider how to reduce the likelihood of each risk and mitigate any potential damage.
- Embed risk and nurture a healthy risk culture. It’s important that everyone—from trustees to staff—understand how they contribute to your nonprofit’s risk profile. This does not mean being risk-averse; rather, encourage everyone within your organization to help manage risk.
- Just say “no” to contracts that are not financially viable. Nonprofits that provide services on behalf of public agencies are often funded through contracts that reimburse for work below cost, come with built-in deficits, and are often paid 60-90 days after the work has been completed. Your senior leadership should be empowered to turn down those contracts with unsustainable economics.
Survive—and thrive—with Sage Intacct
No risk management strategy comes with a 100% guarantee rate. However, sound financial decisions and a healthy culture of risk management can do much to help your organization flourish amid obstacles. Cloud fund accounting software from Sage Intacct provides the internal controls and cash management that help you be wise stewards of donated monies. Dynamic dashboards and robust reporting let you paint a clear, accurate picture of your organization’s financial and operational performance. You can provide the transparency required to secure and keep sponsors and donors on board.
Further ensure mission success with the nonprofit technology experts at JMT Consulting. With our Sage Intacct expertise and nonprofit experience, we’ll help create and implement a solution that can help you take your organization’s financial management to the next level. Contact us today to get started.