Risk management is a financial sustainability strategy. Nonprofit organizations are exposed to financial risks (e.g., fraud, loss in investment, misuse of funds, loss of tax-exempt status, and fund-raising liabilities), which can be anything from reduction in value of an asset to fraud committed by an employee or a member or a burglary committed by someone outside the organization. Financial, personnel, program, and capital expenditure decisions have great potential to generate risk because they involve interactions with changing, complex, volatile, or intrinsically stochastic economic, political, and social environments. Financial risks can affect the liquidity of a nonprofit organization and even lead to its dissolution. As a set of actions, procedures, and tools put in place to prevent and manage risks and emergency situations, risk management helps prevent expenses that could affect the existence of a nonprofit organization. In other words, risk management protects a nonprofit organization against disastrous outcomes that could threaten its survival and abilities to fulfill its vision and mission. The best and most cost-effective way to manage risks is by practicing prevention. Risk management helps put safeguards in place to prevent risks and consequently protect the assets of a nonprofit organization while minimizing liabilities. In nonprofit organizations, the most likely risk is financial loss regardless of the type of risk. Financial loss damages the financial sustainability of an organization. On the other hand, prevention of financial loss can positively affect its financial sustainability.

Box 16.5 Practical Steps to Improve Accountability and Prevent Related Risks

1. Recognize that better accountability leads to greater credibility for the organization and wider support for it.

2. Hold discussions among executives and board members about ways in which this organization might work toward that goal.

3. Explore measurable options (e.g., internal control policies, reports).

4. Follow federal and state laws and Internal Revenue Service requirements carefully.

5. Contract with accountants to conduct financial audits annually.

6. Establish planning and control procedures for each job and each department, including the board of trustees.

7. Provide ongoing training so all board members and employees know what is expected of them.

8. Require compliance with policies regarding conflicts of interest.

9. Develop and disseminate whistle-blower policies so that employees feel free to report concerns without fear of reprisal or retaliation.

10. Have an independent board of directors.

11. Develop a culture of transparency: Have a manual of procedures in place and train board members and staff!

12. Adopt a Statement of Values and a Code of Ethics.

13. Make public your organization's Form 990.

14. Stay current with the law.

Nonprofit organization decisions are made by board members, executives, or volunteer trustees. The impacts of such decisions are felt by the clients or the community served by such nonprofit organizations, or external stakeholders who support or partner with an organization. Risk management includes prevention strategies and insurance plans related to all internal (nonprofit organization owners and employees) and external stakeholders (nonprofit organization partners, providers, clients or customers). It also encompasses preventive measures and procedures and insurance plans concerning all property owned by the nonprofit organization. Finally, it carries liability-based risk provision package insurance coverage for all potential liability claims that can affect the operation or even existence of the nonprofit organization. Therefore, risk management enables a nonprofit organization to ensure that the decisions or actions take into account factors that have the potential to harm internal and external stakeholders and future generations.

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