5 Strategies for Proactive Risk Management at Your Nonprofit

When everything is going well at your nonprofit, risk management may not seem like a priority. It’s easy to become comfortable with your organization’s day-to-day practices and relationships without giving a second thought to difficult situations that might occur. However, if challenges eventually arise, a solid risk management strategy and scenario planning can help your nonprofit recover more quickly.

Many organizations’ risk management plans focus on the steps they’ll take to mitigate problems once they’ve occurred. While mapping out these types of plans is important, you should also take proactive steps to avoid putting your nonprofit in risky situations in the first place.

To help your organization prevent risks, here are five strategies you can incorporate into your organization’s strategy. 

1. Identify and prioritize different types of risks 

Risk management is important for nonprofits because there is a good probability that something bad, like damage from a weather event, or the loss of a funding source, might occur. This might be due to internal circumstances at the organization or external factors outside of the organization’s control.

There are many different types of situations that fall under this definition. Some of the most common nonprofit risks include:

• Cybersecurity violations: Most nonprofits collect and store data about their donors, campaigns, and finances. Cybersecurity violations can leave this data unprotected and expose sensitive information. Additionally, inputting sensitive donor data into free or open AI tools creates additional exposure that your organization should take into account.
• Fraud: There are several types of nonprofit fraud, some intentional and some unintentional. A few common ones include false expense claims, misrepresentation of data on financial statements, and fundraising fraud.
• Theft: Although nonprofits are often composed of good, trustworthy individuals, there are still times when someone close to your organization steals its money or technology. This can happen if individuals who haven’t been properly vetted are given access to resources they shouldn’t have, or if your nonprofit’s internal systems are faulty. 
• Compliance: To maintain their tax-exempt status, nonprofits are subject to many regulations that for-profit organizations aren’t. Following all these guidelines should be part of your risk management plan. 
• Funding losses: Overreliance on a single major donor or grant can leave your organization scrambling to cover essential costs if that funding suddenly disappears. Without thoroughly evaluating existing revenue streams and expenses, your nonprofit may not realize just how fragile or top-heavy your financial foundation truly is. 

The risks that are most likely to affect your nonprofit are highly dependent on your specific organization. Conduct an operational analysis in which you identify all potential risks for your organization and prioritize them based on which ones are most likely to occur and which ones would have the most severe consequences. Then, you can start taking the appropriate steps to prevent those specific risks.

2. Strengthen your organization’s internal policies and procedures

Clear organizational policies set a proactive foundation for risk management, because they ensure your staff knows how to handle complex situations. For example, creating an AI usage policy allows you to commit to leveraging AI responsibly without compromising data security, and an expense reimbursement policy can reduce incidences of fraud and theft by clarifying which expenditures your nonprofit will and won’t reimburse for employees and volunteers.

Alongside these larger policies, you need strong internal controls, which act as procedural safeguards designed specifically to prevent risks. Here are some examples of popular nonprofit internal controls:

• Require two signatures on checks over a certain amount. This process helps catch any errors in payments before they’re submitted and ensures no one person at your organization is held responsible if any mistakes fall through the cracks.
• Reconcile bank statements. Comparing the transactions recorded in your nonprofit’s internal records with those registered in your bank accounts each month allows you to confirm that all funds are properly accounted for and quickly address any discrepancies. 
• Have your board review financial reports. The purpose of your nonprofit’s board is to provide oversight, and they can serve as a second set of eyes on your reports because they usually operate outside of your finance department. 

In addition to helping your organization proactively manage risks, robust policies and internal controls build trust with donors and stakeholders. When supporters have greater trust in your nonprofit, they are more likely to contribute funding, which allows your organization to make a bigger impact. 

3. Conduct independent financial audits 

Since nonprofits are subject to different guidelines than for-profit organizations are, their audits also look somewhat different. Nonprofits, by definition, are exempt from federal taxes, so most (although not all) nonprofit financial audits are conducted by independent external auditors instead of the IRS. 

There are some situations in which conducting audits may be necessary for your organization to remain compliant. To determine whether this is the case, you should check:

• Your nonprofit’s bylaws: Some nonprofit founders stipulate that their organization will need to undergo regular audits to promote financial accountability from the start.
• Your state’s requirements: Many states have a threshold for revenue received annually (usually around $500,000) that triggers an audit requirement for nonprofits operating in that state.
• The amount of federal funding your organization receives: If your nonprofit accepts more than $1,000,000 from the federal government annually—including federal funding passed through your state government—you’ll need to undergo an audit. 
• Grant application requirements: Some grantmakers accept copies of recent tax returns or internal financial statements as proof that your organization will handle funding responsibly if you win their grant. However, others might specifically ask for an audit report. 

Even if your nonprofit isn’t required to undergo independent financial audits, conducting one can contribute to proactive risk management. An external auditor can provide an outside perspective on how your organization manages its finances and recommend areas for improvement—including opportunities to prevent risk.  

4. Outsource some nonprofit roles 

In addition to conducting independent audits, your nonprofit can gain external perspectives on opportunities for proactive risk management by outsourcing certain functions. Outsourced professionals often have experience working with a variety of nonprofits, so they bring cross-organizational expertise that your in-house team may lack to address your unique challenges. Plus, outsourcing is usually less expensive than hiring a new team member and provides a scalable solution to staffing gaps.

Several nonprofit roles lend themselves well to outsourcing, including:

• Information technology department. External IT professionals can help your organization implement data security measures and train your staff to recognize and prevent cybersecurity violations.
• Human resources professionals. Consultants and services specializing in nonprofit HR can run your payroll, review your compensation packages and hiring processes, and ensure compliance with labor laws.
• Financial management services. Working with an outsourced nonprofit chief financial officer (CFO) or accountant can provide holistic financial and strategic expertise in internal controls, audit preparation, reporting, monthly close procedures, and various other essential functions. 

When hiring any of these outsourced professionals, make sure to vet potential providers carefully. Ask them about their experience with risk management and what safeguards they put in place to ensure a successful partnership.

5. Review and update your risk management plan regularly 

Risk isn’t static. To stay ahead of emerging threats, establish a recurring, collaborative review cadence for your plan. Rather than making risk management solely a board-level priority, treat it as a cross-functional team effort. 

Engaging your nonprofit’s board, leadership, and key staff members in your plans ensures that your risk management plan stays aligned with your organization’s current size, funding mix, and day-to-day operational realities. A reliable  fund accounting system is part of what makes this ongoing monitoring sustainable for your team.

Additionally, you should always reassess your risks after major organizational changes. A new program, a large grant, or a shift in staffing is a natural trigger to revisit which risks are now most pressing. This is also the right time to review risks associated with vital resources like your volunteer base to ensure your organization is adapting its broader risk picture as operations scale or pivot and avoid any accounting bottlenecks. 

When your organization sets a high standard for accountability through internal controls, regular audits, outsourcing expertise, and ongoing monitoring, you’ll be in a better position financially and operationally. Proactive risk management strengthens your organization’s day-to-day operations and its ability to survive a crisis. 

Interested in more ways to help your organization focus on financial stability and minimize risk? Check out the guide, Future-Proofing Your Organization’s Finances.