The impact of global unrest and uncertainty on the not-for-profit sector
By Israel Tannenbaum, HLB USA
Not-for-profit (NFP) organisations continue to face a growing list of risks that can disrupt their operations, damage their reputation or brand, and cause significant financial losses. Whether it’s social unrest, racial reckoning, political turmoil, global war, or other crises, a proactive and comprehensive approach to managing these risks can help reduce potential losses.
The impact of global unrest and uncertainty on NFP
NFPs depend heavily on fundraising for operation, especially through charity events. When these events are disrupted because of a crisis, they may experience a decline in revenue. For example, because of the COVID-19 pandemic, in-person fundraising events have been called off, cutting off a significant revenue stream for NFPs.
One study revealed that about 83% of NFPs reported a decline in revenues during the pandemic, including a reduction in earned revenue from events or other activities and a decline in individual giving and grants. This decline in revenue has affected the NFPs’ ability to fulfil their missions and retain employees.
NFPs also rely heavily on government assistance, which may be in the form of grants or part of a matching scheme. So when there’s political upheaval, social unrest, or economic crisis, government agencies that provide financial support to NFPs may significantly reduce funding, forcing NFP organisations to take on more responsibilities with fewer resources.
Global unrest and uncertainty not only create significant financial losses to NFPs. It can also shift NFPs’ mission to respond to the crisis, straying them away from their mission. For instance, many NFPs have changed their fundraising efforts during the pandemic to support social and economic recovery efforts. In 2020, around 51% of NFPs raised funds for COVID-19 relief, while about 19% fundraised for racial justice causes.
Protecting your NFP from risks
Avoiding global unrest, uncertainties, and risks is impossible, but you can mitigate their impact by developing a good risk management strategy. Risk management refers to the process through which NFPs deal with potential risks to their business. Here are the steps involved in risk management:
1. Identify potential risks
To identify potential risks, consider performing a risk assessment. This involves identifying risks specific to your NFP and its culture, technology, finances, and operations. You can then arrange all the identified risks in order of priority. This ensures that those risks that can affect your NFP significantly are dealt with more urgently. If your NFP doesn’t have the capacity or the expertise to take on risk assessment, consider hiring a professional to help.
Before conducting the risk assessment, consider creating a risk committee and identify who will lead the efforts of this group. It’s essential to have a designated person in charge of these efforts so that the process is centralized and streamlined.
2. Analyze the risks
Once you’ve identified potential risks, analyze them. This analysis involves understanding the risk’s scope and the connection between it and its potential impact on your NFP.
To determine the severity of the risk, consider the difficulty level in preventing them, the resources required if you fall victim to them, and how important the result might be to your organisation.
When determining the likelihood of a risk occurring, consider rating the risk on a scale from 1 to 5. Here’s an example:
- 1- Rare: This means the risk is very likely to happen.
- 2- Unlikely: The risk may not happen, but there’s a little possibility.
- 3- Possible: The risk is likely to occur sometimes but not regularly or frequently.
- 4- Likely: This means the risk is likely to occur regularly.
- 5- Certain: The risk occurs most of the time.
You can also use a similar scale to rate the impact of the risk. Here’s an example:
- 1- Insignificant impact: Little to no impact on your NFP’s operations, reputation, or future health.
- 2- Minor impact: There’s a potential for a small impact on your NFP’s reputation, operation, and future health.
- 3- Moderate impact: The risk could lead to some disruption of operations or negative publicity.
- Significant impact: Your NFP’s daily operation would be disrupted and receive negative publicity.
- Major impact: Your organisation’s operations would be interrupted for an extended period, and major negative publicity would occur.
When analyzing risks, it's important to work with a group of people familiar with your NFP organisation and its inner workings. This can help you effectively determine how likely a risk is to occur and its impact on your NFP.
3. Evaluate risks
Evaluating risks involves ranking and prioritising them on your list based on how quickly they should be addressed. Some risks may be very time-sensitive—for instance, if you have a financial audit approaching, you should address any financial risks immediately. Some risks may allow for a slower response time, which is totally okay. This can free up your time to focus on the more urgent risks.
4. Address the risks
Each risk that the committee identifies should be eliminated, if possible. If it’s impossible to eliminate it completely, contain it as much as possible. To address the risk successfully, you can seek the help of experts in the field where the risk belongs. For instance, if your identified risk is financial, you can connect with a CPA firm with a history of serving NFP organisations.
All relevant stakeholders on your risk management committee must be a part of the conversations with the experts so they can fulfil their obligations to the committee by supporting and overseeing the mitigation of risk.
5. Monitor and review the risks
There are risks that will always be present. For instance, market risk — the risk of financial loss due to movements in the market — is impossible to eliminate. If your NFP organisation has investments, for instance, in an endowment, or stocks, you need to monitor market risk constantly. It’s impossible to get rid of this risk if you don’t eliminate the investments the risk is tied to.
Another thing to remember is that risk is always evolving, so how you manage and mitigate them can also change. This is why constant monitoring of the risks is important. It’s not a “once and done” activity but must occur regularly throughout the year.
Your risk management committee must oversee this and develop a documented plan that outlines how risks will be monitored regularly. You can include this process in your NFP’s bylaws for an additional accountability measure.
Develop an effective risk management plan with HLB
Your NFP may encounter many risks that can affect its growth and survival. Thus, it’s important to understand the basic principles of risk management and how you can use them to help mitigate the impact of risks on your NFP.
If you need help developing an effective risk management plan, contact us. Our experienced HLB audit professionals across the globe have a solid understanding of the wide range of risks your organisation may face. We specialise in helping you identify and manage risks to ensure that — when risks become a reality — you can handle the consequences and bounce back to protect your NFP organisation and its success.