Manage Uncertainty with Risk Management for Nonprofits

Nonprofits often operate in unpredictable environments. They rely on donations, grants and volunteers to achieve their goals, but unforeseen events can jeopardize their mission.

Nonprofits face unique risks that demand proactive management, whether a financial shortfall, a public relations issue or a legal complication. By using nonprofit risk management strategies, organizations can reduce uncertainty, protect their assets and keep their mission on track.

What Types of Risks Do Nonprofits Face?

Nonprofits face many risks that can affect their operations, finances, reputation, etc. By understanding these risks, organizations can create safeguards that reduce their impact. Here’s a breakdown of the most common risks nonprofits face:

Operational Risks

Operational risks involve the everyday functions of a nonprofit.

These might include staff shortages, outdated technology or volunteer mismanagement. Suppose your organization relies heavily on a specific database for donor management; the risk would be a system crash, disrupting your fundraising efforts and delaying projects.

Other examples of operational risks include poor communication between departments or an over-reliance on key individuals. If someone in your staff with institutional knowledge unexpectedly leaves, the organization could lose critical information needed to run smoothly. Managing operational risks starts with having clear processes, cross-training staff and maintaining up-to-date tools.

Financial Risks

Money can be unpredictable for nonprofits. Most rely on donations, grants and event income to keep things running, but these sources aren’t always steady. A sudden drop in contributions could mean cutting back on programs people depend on.

At the same time, mistakes like budgeting errors or mixing up restricted funds can cause even bigger issues. That’s why good nonprofit risk management focuses on spreading out funding sources, keeping clear financial records and checking budgets regularly to stay on track.

Reputational Risks

A nonprofit’s reputation is what keeps it going.

Donors, volunteers and partners rely on trust, and that trust directly affects funding and support. Reputational risks can come from mismanaged events, unethical behavior by staff or even false accusations that spread in the media.

Take, for example, a nonprofit that mishandles donor information. Such a mistake could damage its credibility and make people hesitate to give. To avoid these situations, nonprofits need clear privacy policies, quick responses when problems arise and open communication with everyone involved.

Legal and Compliance Risks

Nonprofits must follow many rules, from filing reports on time to complying with tax laws and nonprofit bylaws.

Organizations classified as 501(c)(3) or 501(c)(6) must meet different reporting and operational requirements to maintain their tax-exempt status. Missing deadlines or skipping legal requirements can lead to fines, lawsuits or even loss of tax-exempt status.

If a nonprofit, like a 501(c)(3), forgets to report unrelated business income, it could attract unwanted attention from the IRS. Similarly, a 501(c)(6) organization that doesn’t follow lobbying limits could face compliance issues. Staying on top of these rules means building checks into your processes. It’s a straightforward way to avoid bigger headaches later on.

Strategic Risks

Strategic risks come from choices about the long-term goals of the organization. A nonprofit might take on a project it doesn’t have the resources to complete. That could leave it overextended and unable to deliver on its promises. Leadership changes can also cause problems if there’s no plan for who takes over next.

To avoid these risks, nonprofits should regularly review their goals and resources. It also helps to have a succession plan and involve the board in key decisions. These steps keep things running smoothly and help the organization stay focused on its mission.

External Risks

Some risks are external and are beyond a nonprofit’s control. Economic downturns, natural disasters or global crises like a pandemic can all disrupt operations. Rising inflation might make it more expensive to run programs, or a hurricane could destroy essential assets.

While these events cannot be predicted, you can still prepare for them. Building contingency plans and setting aside emergency funds can make a big difference. This way, your nonprofit will be ready to continue serving their communities no matter what happens.

The Importance of Risk Management for Nonprofits

Don’t think of risk management as just a formality. It’s a way to protect your mission.

When nonprofits identify and address risks early, they can avoid disruptions that might otherwise derail their work. For example, a well-thought-out nonprofit risk management plan can prevent financial shortfalls by accounting for potential funding gaps.

Risk management also improves relationships with stakeholders.

Donors want to support organizations they see as reliable and capable of handling challenges. Volunteers and board members are more likely to stay engaged when they see the organization is well-prepared.

Additionally, being proactive with risk management saves time and money in the long run. Addressing a data breach or a lawsuit after it happens is much more costly than preventing it in the first place. Ultimately, risk management allows nonprofits to focus on their mission with confidence.

How To Develop a Risk Management Plan for Your Nonprofit

Creating a nonprofit risk management plan doesn’t have to be overwhelming. By breaking the process into clear steps, you can develop a strategy for your nonprofit that suits your needs and secures long-term stability.

Identify Potential Risks

Start by identifying all potential risks, from the obvious to the unexpected. Consider risks related to staff, finances, reputation, legal obligations and external factors. Reviewing past incidents can help uncover patterns or vulnerabilities that need attention.

If, for example, your nonprofit has experienced cybersecurity breaches in the past, this is a clear area that requires stronger safeguards. A brainstorming session with your team or board can also help surface risks that individual staff members might not recognize.

Assess Potential Risk Impact

Once risks are identified, evaluate their likelihood of occurrence and the damage they could cause. The most likely and damaging risks should be addressed first.

Losing access to donor data during your busiest fundraising season could have severe consequences while running out of office supplies might be less critical. Use a simple ranking system to categorize risks by severity and likelihood to guide your priorities.

Develop Mitigation Strategies

The next step is to figure out ways to lower the chances of these risks occurring — or to reduce the damage if they do.

To avoid financial trouble, you might have to look for new funding sources, apply for more grants or set up a recurring donation program. If you’re worried about reputational risks, having a crisis communication plan will help you respond quickly to negative press or public concerns.

Think of mitigation strategies as your safety net. While it’s impossible to eliminate risks entirely, having a plan reduces the damage they can cause.

Assign Team Members

Everyone needs to know their role when it comes to managing risks. Your finance director could focus on funding issues, while a board member could take the lead on legal compliance.

Make sure these roles are clearly documented and communicated to your team. Confusion is avoided when everyone knows who’s responsible for what, and your organization can respond quickly when an issue arises.

Monitor and Review Regularly

Managing risks isn’t a one-time task. Risks change over time, and new ones can show up unexpectedly. That’s why it’s essential to revisit your nonprofit risk management plan on a regular basis.

Set up reviews every few months or at least once a year to assess whether your strategies are still working. If something changes, a risk that seemed small before might become a bigger concern. Regular check-ins allow you to adjust your plan to stay effective.

Best Practices for Nonprofit Risk Management

Good risk management doesn’t happen by accident. It takes consistency and planning. By following best practices, nonprofits can stay prepared for challenges and keep things running smoothly.

Focus on Prevention

The easiest risks to manage are the ones that never happen. Start by identifying weak spots in your organization and addressing them early. If you store donor information, make sure it’s protected with strong cybersecurity measures like encrypted systems and regular updates. If finances are a concern, set aside a reserve fund to cover unexpected costs.

Prevention also means training your team. When staff and volunteers know how to spot risks — like a data breach or a safety issue — they’re more likely to avoid them. Simple steps now can save you a lot of trouble later.

Read more: Nonprofit Databases 101: How To Organize Your Supporter Relationships

Clear Communication

Communication plays a vital role in managing risks. Nonprofits should establish clear lines of communication between staff, volunteers and the board. If a staff member identifies a potential issue, they should know whom to report it to and what steps to take.

Transparency is also critical when dealing with external stakeholders. If a risk affects donors or beneficiaries, communicate openly about the situation and the steps being taken to resolve it. This builds trust and keeps everyone on the same page.

Read more: How to Build Healthy Donor Relationships: Essentials + Quiz

Keep Thorough Records

Good documentation makes nonprofit risk management easier. Keeping accurate records of financial transactions, board meetings and compliance reports helps you spot problems before they grow. Detailed financial records, for instance, can show if you’re heading toward a budget shortfall. With that information, you can adjust before it’s too late.

Records also act as a safety net. If your nonprofit is audited or faces legal questions, organized, up-to-date documents can show you’ve done everything by the book.

Read more: How to Take Board Meeting Minutes + Template

Utilize Tools and Resources

The right tools can make managing risks simpler. Whether it’s software for tracking risks or advice from experienced professionals, nonprofits have options to make their work more efficient. Platforms designed for nonprofits can help manage finances, compliance and data security all in one place, saving time and reducing human error.

Risk Management Software

Managing risks can feel overwhelming, but tools like Ostendio and Hyperproof help simplify the process.

Ostendio focuses on security and compliance. It’s designed to help organizations build a clear security framework, manage their risks and protect sensitive data. Nonprofits handling donor information can use Ostendio to track compliance with privacy standards and keep their systems secure.

Hyperproof takes a slightly different approach. It helps nonprofits stay organized during audits and keep an eye on risks over time. Instead of scrambling to gather documents for compliance checks, Hyperproof makes it easy to track everything in one place. It also connects with tools you might already use, so you don’t have to start from scratch.

Both platforms save time and reduce manual work, which is critical for resource-limited nonprofits. With tools like these, nonprofits can spend less energy worrying about risks and more time focusing on their mission.

PCI-Compliant Payment Processor

Handling payments securely is vital for nonprofits accepting online donations. Using a PCI-compliant payment processor protects donor information and reduces fraud risks. WildApricot’s online payment processing system is certified Level 1 PCI DSS compliant, adhering to the highest payment security standards.

With WildApricot, members can pay online for memberships, event registrations and donations from any device. The system supports recurring payments, simplifying the process for regular contributors. Additionally, WildApricot automates invoicing and receipts, streamlining your organization’s financial management.

National Council for Nonprofits

The National Council for Nonprofits provides an extensive library of risk management resources. Their tools cover topics like cybersecurity, financial management and crisis response. For instance, their cybersecurity guide for nonprofits outlines practical steps to protect against digital threats.

Nonprofit Risk Management Center

The Nonprofit Risk Management Center (NRMC) provides tools and services specifically designed for nonprofits. They offer training, consulting and resources to help organizations identify risks and create plans that align with their mission. In addition to custom consulting, NRMC provides free tools like educational guides and interactive resources to help teams address challenges and build stronger risk management strategies.

Managing Risks To Serve Your Mission

The nonprofit world is full of uncertainty, but having a solid nonprofit risk management plan can help you stay in control. When you understand the risks your organization faces and take steps to address them early, you can protect your mission, reputation and resources.

With the right strategies in place, your nonprofit can spend less time worrying about what might go wrong and more time doing what matters most: serving your communities and making a difference.