Not-for-profits have at least one thing in common with for-profits: Only the strong survive.
The not-for-profit sector is extremely competitive and even a relatively small shift of fortunes can threaten an organization’s future. When events such as the death of a major donor or the loss of grants, organizations turn to their leaders to minimize the damage and restore stability. But all too often there is no plan in place to tackle risks.
Astute not-for-profit leaders don’t wait for a storm. By making a risk analysis and confronting the possibilities ahead of time, they prepare their organization to weather rough times.
During the 2016 presidential campaign, candidate Ben Carson claimed in several interviews that nine out of 10 not-for-profits fail as he touted the success of the Carson Scholars Fund, a college scholarship fund he and his wife set up. In a report that same year, the Concord Leadership Group suggested that about half of not-for-profits could fail.
The not-for-profit consultancy’s Nonprofit Sector Leadership Report, a survey of 1,000 nonprofit leaders, staff members, directors and volunteers, found that 77% of respondents said their group had no leadership plan or program in place. In addition, 49% said they were operating without any knowledge of or access to a strategic plan.
This isn’t the best position to be in for a sector that is particularly fragile. How fragile? A few examples illustrate:
- An organization built on one income stream can crumble quickly if the stream dries up because a grant or a government contract is canceled.
- A group depending on one donor, or a small group of donors, can tumble if the donor passes away or bails, or the contributors find a more attractive option.
- An organization ignoring the wishes of major donors or takes a direction donors don’t like risks losing contributions as supporters swing over to causes they find more compatible with their worldview.
- A group hit by a scandal, such as funds misappropriated by an executive or a marital scandal, may find that public opinion quickly shifts and donations erode.
Gauging the Risks
The question, then, is how can you shore up your group? The first step is to become more strategic in examining your business model. Leaders and staff should develop a solid understanding of the group’s dynamics: How do all areas of operation interrelate and affect the organization’s mission? How can you maximize benefits without unduly jeopardizing the organization?
Identifying the main threats and developing strategies to abate them is critical for both the survival of the organization and the well-being of those it serves.
In 2015, the Federation Employment and Guidance Service (FEGS), which had an annual operating budget of about $250 million, filed for bankruptcy and closed its doors. As a result, 1,900 people were out of work, creditors were left holding more than $47 million in debt, and 120,000 households who relied on the supplier of mental health, disability, housing, home care and employment services in New York had to be transferred (See sidebar: The Downfall of a Giant).
“Facing a Crisis”
Soon after, the Human Services Council released a report calling for urgent reforms to prevent a looming crisis in the not-for-profit sector. The 45-page report, titled New York Nonprofits in the Aftermath of FEGS: A CALL TO ACTION, suggested that the not-for-profit sector itself wouldn’t survive without fundamental changes in reimbursement models and regulatory burdens. It concluded that the failure of FEGS was symptomatic of “a sector facing a crisis.”
The report made eight recommendations, including: reducing regulations, increasing reimbursement and warning providers to be more responsible and avoid city or state contracts that don’t pay the full cost of services.
Similarly, early in 2017 the Open Road Alliance, a private initiative that provides grant capital, published a toolkit to promote best practices of risk management. The alliance pointed out four steps to take:
- Risk assessment. Identify, evaluate and prioritize risks based on likelihood and potential consequence.
- Risk mitigation. Determine and take steps to manage identified risks.
- Contingency planning. Develop alternative plans in the event that the unexpected happens.
- Risk monitoring. Determine methods to actively monitor known and new risks as they arise.
Addressing the Threats
As a result of these and similar reports and recommendations, leaders in the not-for-profit sector are starting to change their perspectives from reactive to proactive. For example:
- Managers, directors and staff are working together to identify and monitor risk.
- Boards are shifting their focus from fiduciary responsibilities to confronting risks relating to the organization’s mission and strategic direction.
- Staff are providing context and valuable data.
Reminder: Although this is a team effort, the organization will be taking its cue from its leaders. At its core, risk management is a security measure that should be incorporated into daily activities. As uncertainty continues and new threats emerge, the ability to engage in viable strategies becomes more important than ever. With that in mind, here are four practical suggestions for embracing this approach.
- Establish a committee to develop a risk management program. This might include people from diverse areas of the not-for-profit such as employees in administration and operations, finance and programming, as well as volunteers.
- Identify the most crucial situations where risk is most likely to impact the organization. For example, a “top ten list” might include loss of grants, naïve crisis planning, poorly understood or managed donor relationships and lack of practical governance practices.
- Determine how likely each threat is to occur.
- Set priorities so the most important items can be addressed first.
Creating this blueprint will help build awareness about numerous aspects that should be monitored and enables the organization to identify where and when it is most vulnerable.
Act Before Threats Rear Up
It is then up to leadership to assess the potential effect of each identified risk. Follow up by mitigating the most urgent threats. Protect your organization by acting before its survival is threatened.
The Downfall of a Giant
This highly publicized downfall of the huge Federation Employment and Guidance Service (FEGS) in 2015 is a humbling reminder of the need to identify and address potential threats.
Until it filed for bankruptcy, FEGS delivered a wide array of mental health, disabilities, housing, home care and employment services in New York, working with an annual operating budget of about $250 million.
The agencies that contracted with FEGS were blindsided by its poor financial condition and were forced to find replacement providers.
Eric Cohen, CPA is the President and Founder of E. Cohen and Company CPAs, a full-service CPA firm serving nonprofit organizations, government contractors, professional service companies and other industries with audit, tax and business advisory services for over 26 years. The firm was commended as a SmartCPA Reader’s Choice by SmartCEO magazine and a “Best Accounting Firm to Work For” by AccountingToday magazine. For more information, visit www.ecohencpas.com or call 301-917-6200.