Our research, based on the first comprehensive financial analysis of New York's nonprofit sector, found that 10% of the city's nonprofits were insolvent and 40% had virtually no cash reserves. Less than 30% were financially strong. If anything, things are getting harder, given market volatility, the move to value-based payments in health care, and increased costs for real estate and labor.
Fortunately, we also discovered that nonprofits can take a few concrete steps to reduce their risk of failure and sustain vital programs:
Make risk management an explicit responsibility of the audit and/or finance committee.
Develop a risk-tolerance statement, indicating the limits for risk-taking and the willingness to trade short-term impact for longer-term sustainability.
Keep a running list of major risks and the likelihood and expected loss for each.
Put in place plans for how to maintain service in the event of a financial disaster, or even a "living will" that specifies how programs will be transferred to other providers (or wound down in an orderly fashion) in the event that recovery is not possible.
Brief trustees regularly about longer-term trends in the operating environment.
Periodically explore the potential benefits of various forms of organizational redesign, such as mergers, acquisitions, joint ventures, partnerships, outsourcing, managed dissolutions, and divestments.
Compare financial performance to peers on an annual basis.
Develop explicit targets for operating results (margins, months of cash, etc.) and contingency plans if minimum targets are not met.
Redouble efforts to build and safeguard a financial cushion or "rainy-day fund," even if doing so forces consideration of difficult programmatic trade-offs.
Doing any of these will depend on a functioning partnership between capable management and a critical mass of experienced, educated and engaged board members. Therefore, organizations serious about risk management must work hard to recruit board members with a wide range of experience. They need to ensure ongoing education for both new and existing board members and to empower high-functioning committees. Many organizations, particularly large and complex ones, would also benefit from having an experienced nonprofit executive on their board.
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