Nonprofit Risk Management Strategies: Complete Implementation Guide

Every nonprofit loves a little publicity: an innovative program that solves a real need or a prominent community member highlighting the benefits of your organization.

But no nonprofit wants to be in the headlines for fraud.

Even if the incident was unintentional or the result of a security breach, it can still erode the trust your organization has built with donors and your community. Luckily, there are many strategies you can put into place to help your nonprofit mitigate risk.

From financial risk strategies to protecting your operations and mitigating legal risk, here are some strategies your nonprofit can use to manage risk and lower your chances of ending up in the headlines for the wrong reasons.

Financial Risk Strategies: Safeguard Resources First

Financial risk management starts with ensuring your organization’s cash flow is protected and your assets are secure. Strong financial practices help your organization remain resilient and trustworthy. Here are some ways to safeguard your resources and minimize financial risk.

Cash Flow Protection

Having and maintaining operating reserves can help you protect your cash flow when you have short-term surprises. The first step is to establish or review your operating reserve fund policy. This policy, and managing your operating reserves intentionally, helps your organization weather unexpected financial challenges, such as delayed grant payments or unforeseen expenses.

You also protect your cash flow by having a variety of revenue channels. Diversifying your revenue streams, such as through a combination of government and private

grants, individual donations, and earned income, reduces dependency on any single source and protects against volatility. If you lose a major donor or you have to cancel a program due to lack of volunteer support, you are less likely to have to make fast and drastic changes.

In addition to operating reserves and diverse revenue streams, you need to run scenarios so you can understand different possibilities that could affect your organization. Scenario planning and forecasting prepare your team for multiple outcomes, whether it’s responding to a sudden drop in donations or capitalizing on new funding opportunities. Having a plan is the first step to protecting your cash flow.

Payment and Expense Controls

Implementing and following robust controls over payments and expenses help minimize risk. For example, setting dual-signature requirements for expenses above a certain threshold helps prevent unauthorized disbursements. Implementing purchase approval workflows ensures accountability, while clear expense reimbursement protocols guard against fraud. Secure your bank accounts by limiting access and establishing regular monitoring to add another layer of protection.

Set up your controls within your fund accounting system to ensure that they are followed. For example, require any expense request to have an attachment so you know receipts and invoices follow the request and can easily be matched. You can set up automations to make sure workflows are easy to follow. If an expense is over your two-signature limit, the system will automatically flow to the second approver once the first is complete.

Grant Compliance and Donor Stewardship

If your organization works with a lot of restricted funding, like from grants or major donors, you know the importance of granular tracking and reporting. Without those systems, you might not be able to show funds were used as the funder intended and open your organization to reputational or funding risk.

Effective fund accounting systems with subfund capabilities allow for precise tracking of your restricted funds, making it easier to stay in compliance and improve donor confidence. The next step to mitigating the risk of poor compliance is to integrate your systems to create a single source of truth, reducing errors and improving transparency. Establish seamless integrations between your fund accounting system and fundraising, payroll, and complex budgeting tools to make sure data flows easily and accurately.

Annual Internal and Third-Party Audits

Audits provide stakeholders, donors, and funders with assurance that their contributions are being managed responsibly. Regular audits also verify compliance with laws and regulations, help identify areas for improvement, and set you up for future funding opportunities. Audits can help you identify small issues before they become work-stopping (or trust-eroding) problems.

You’re probably most familiar with the external financial audit, where you partner with an independent audit firm to verify your financial statements. But you can also do an internal audit, using your organization’s resources to look for any discrepancies between your external audits. These are good to verify you’ve addressed any deficiencies or notes from the previous audit before the next one starts.

If you have federal grant funding over $1 million, you are required to do a compliance audit, or a Single Audit. These are dictated by Uniform Grant Guidance published by the Office of Budget Management (OBM).

Cybersecurity Risk Strategies: Protect Your Data

Protecting sensitive data is non-negotiable for nonprofits. Create secure systems and establish vigilant protocols to keep donor and organizational information safe from cyber threats. Here are a few strategies your nonprofit can use to protect your data.

Data Protection

Encrypt donor databases and ensure payment processing security. Check with the vendors you use for payments to make sure they have the most up-to-date technology to secure your information and that of your donors. Make sure your organization follows cloud storage best practices, such as regular backups and secure access, to minimize the risk of data loss.

Another way to minimize cybersecurity risk is to establish comprehensive data governance policies that clarify how data is collected, stored, and shared. Putting these processes in place can help prevent accidental exposures and set expectations for how you manage and delete data you no longer need.

Access Control Systems

Use the rule of least privilege to manage user roles and permissions. By restricting access to confidential information to only those who need it, you limit the chances of someone accidentally sharing sensitive data.

Also, enforce strong password policies and require multi-factor authentication to defend against unauthorized access. Require your staff to regularly change their passwords, like every six weeks or every quarter. Establish cohesive cloud storage protocols and connect your systems through secure APIs to create a single source of truth. These steps promote both security and operational efficiency.

Incident Response Planning

If your organization hasn’t been hit with a security incident, chances are, you will at some point. Preparation is the key to mitigating the impact of cyber incidents. Well-documented data breach response procedures provide a clear roadmap when the unexpected happens. Your plan should outline everyone’s roles and expected timelines. Be sure to refer to any state laws or federal regulations that apply when creating your response plan.

Require your vendors to meet security standards that protect your systems from external vulnerabilities. Backup and recovery processes also ensure your operations can resume quickly after disruptions, which minimizes downtime and loss.

Operational Risk Management: Ensure Safe and Effective Delivery

Operational risks directly affect your nonprofit’s daily functions and its ability to deliver programs safely. Proactive management secures your people and your impact. Here are a few ways you can mitigate operational risk.

Staff and Volunteer Safety

Create policies for and perform background checks to identify potential risks before onboarding staff or volunteers. You will likely need different levels of checks depending on the role. Those working with children will need a deeper check than those repackaging food for a pantry.

Make sure your organization has a whistleblower policy, and employees and volunteers know how to access it. This policy offers a confidential way for individuals to report concerns. Also make sure you have robust insurance in place to protect your organization in case of unforeseen incidents.

Program Delivery Risk

Standardized service delivery protocols ensure your clients receive consistent and high-quality support. Outline what is expected from volunteers and employees in terms of responsiveness, availability, and outcomes.

Implement client safety procedures, such as risk assessments for new programs, to help prevent harm. Regular quality assurance measures like these keep your services on track and aligned with best practices.

Vendor and Partnership Management

Conduct due diligence on vendors and partners before entering agreements. If you don’t have a due diligence checklist, or you haven’t updated yours in the past few years, check with peer organizations or industry associations to make sure you are asking the right questions. Also review contracts carefully—from current and potential vendors—and assess third-party risk to avoid liability and ensure mutual accountability.

Compliance and Legal Risk Strategies: Maintain Your Standing

Compliance extends beyond finance—legal risks can threaten your nonprofit’s existence. Proactive compliance shields your organization from penalties and protects your reputation.

Tax-Exempt Status Protection

Adhering to IRS filing requirements and deadlines preserves your nonprofit’s tax-exempt status. This includes your form 990 as well as any payroll filings required for your organization.

Register for charitable solicitation and maintain an annual compliance calendar to keep you ahead of any regulatory obligations. Bring in your auditor and legal counsel to routinely audit compliance requirements to make sure you are up to date.

Board Governance Controls

Establish a conflict of interest policy to safeguard against decisions that could harm your nonprofit’s credibility. Require your board and leadership to take regular fiduciary duty training so board members know and acknowledge the full extent of their responsibilities.

Also make sure you have accurate meeting documentation to provide transparency and protect your organization in case of disputes.

Employment Law Compliance

Strong HR policies, including harassment prevention and wage compliance, prevent costly legal challenges. Develop clear procedures, conduct training, and perform regular reviews for employees and key volunteers to help ensure your nonprofit remains a fair and lawful employer.

Crisis Management and Business Continuity: Be Prepared for the Unexpected

Crisis management is about responding effectively to emergencies and ensuring business continuity. Preparation enables your nonprofit to protect its reputation and sustain operations. Here are a few ways you can help your organization prepare.

Emergency Response Planning

Develop procedures for natural disasters, pandemics, and other emergencies so your organization can respond quickly and protect staff, clients, and assets. This should include a communication crisis plan to ensure messages reach stakeholders accurately and promptly.

Reputational Protection

Set up alerts, monitor social media, and prepare public relations responses to help your organization manage its image during challenging times. Know the types of situations you want to respond to, and which ones would be better for you to not issue a formal statement. For example, you may decide to provide formal statements on policy changes that affect your impact area of early childhood education but remain quiet on issues related to overseas conflict. Well-planned stakeholder communications foster trust and clarity, even under pressure.

Succession Planning

Mitigate key personnel risk by developing leadership transition plans and knowledge transfer systems to help your organization thrive even during changes. Document internal controls and procedures to provide continuity and support long-term resilience. Understand what cross-training needs to happen in the event of a quick departure or to help on-board a new hire.

Prioritizing and Implementing Your Risk Management Strategies

To build a comprehensive risk management program, nonprofits must prioritize risks and execute strategies effectively. A structured approach turns risk management into an ongoing asset.

Risk Assessment Process

Start by using risk self-assessment tools or seeking professional audits to identify vulnerabilities. Prioritize risks using a matrix that weighs potential impact and likelihood, allowing you to focus on the most critical threats first.

Building Your Risk Management Team

Assign clear roles within a risk management committee and integrate external professionals where needed. Collaborative teams draw on diverse expertise and keep risk management dynamic and relevant.

Monitoring and Review Systems

Regularly schedule financial and internal control audits, along with performance metrics and policy updates, to maintain your risk management program’s effectiveness. Review and revise your policies on a semi-annual or annual basis to ensure your nonprofit adapts to evolving risks.

Strengthen Your Nonprofit’s Risk Management with the Right Software

Software built for nonprofits and designed to integrate seamlessly can help you build better internal controls, monitor risks, and ensure compliance. Investing in the right systems supports consistent and secure operations, making risk management part of your organizational culture.

Check out our guide, 3 Ways Fund Accounting Software Helps Create Strong Internal Controls, to see how the right systems make it easy to mitigate risk.