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.