Risk Management for Nonprofits

Risk management is a process carried out by management to evaluate an entity’s financial and operational risk areas and how to best prevent and manage those risks. This process is typically carried out by for-profit companies and larger nonprofit organizations; however, nonprofits of any size are just as susceptible to these risks, especially if those risks are not properly managed. This was one of the reasons for the downfall of FEGS, once the largest social service nonprofit in New York.

Nonprofit organizations are organized and driven to carry out their missions, which can easily become the main focus for those managing the organizations, not planning and designing operations to prevent insolvency. Nonprofits are businesses and should be managed very similarly to how a for-profit company would be managed, especially when it comes to risk management. Also, smaller nonprofits likely do not have appropriate procedures in place that allow for management to become aware of a potential issue timely enough to prevent it.

Nonprofit organizations can learn from the FEGS story. A report by Oliver Wyman and SeaChange Capital Partners provides insight and guidance for those in charge of managing these organizations and the steps towards applying or improving how they manage risk. The report focuses on the unique operations and conditions of a nonprofit, the role of governance and the process that can be put into practice to identify and manage events that can put the nonprofit at risk, the reality of how insolvent a nonprofit really is, and situations of financial distress and how those managing the nonprofit dealt with the risk of becoming bankrupt.