To sustainably fund its mission, your nonprofit needs to not only encourage engagement from its supporters, but also cultivate their loyalty. Donor loyalty is built on trust, so it’s vital to instill confidence in how you’re managing your organization to make a positive impact, especially when it comes to finance.
While developing procedures for everyday recordkeeping and regular reporting is important, effective nonprofit financial management also involves planning for the unexpected. This is where risk management plans come in.
In this guide, we’ll walk through four steps for creating a financial risk management plan that can help see your organization through challenges that may come your way. Some of these actions can also strengthen your day-to-day procedures, helping you demonstrate that you’re using donors’ contributions as promised for a good cause. Let’s dive in!
1. Identify Potential Risks to Your Organization’s Finances
The first step in risk management is to consider all possible negative situations that could impact your nonprofit. While no one likes to think about what might go wrong, you need to know what you’re up against in order to prevent or mitigate these issues.
Some of the most common types of risk that can affect your nonprofit’s finances include:
- Cybersecurity violations. Your organization’s donor database, fundraising platforms, and accounting software store a lot of sensitive financial information on your nonprofit and its supporters. If a breach occurs, everything from credit card and bank account numbers to wealth screening data could fall into the wrong hands.
- Fraud. Fraud can occur internally or externally at your organization. Internal fraud can be intentional or unintentional, but distinguishing between the two can be difficult, and recovery is challenging in either case. Externally, the most common type of fraud is impersonation, in which a scammer uses your nonprofit’s employer information and branding to set up a fake online donation page and “collect gifts for charity” while pocketing the money.
- Theft. If internal systems are faulty or individuals gain access to resources they shouldn’t be able to touch, it can lead to situations where people close to your nonprofit (staff members, board members, volunteers, etc.) steal money or technology.
- Noncompliance. Because of its tax-exempt status, your nonprofit is subject to certain compliance and legal regulations and standards that for-profit organizations aren’t. Failing to comply with these rules can risk your organization’s funding, and in some cases, it could be your 501(c)(3) registration.
Ask the Right Questions to Uncover Blind Spots
It’s one thing to list out common financial risks, but identifying the ones most relevant to your organization requires deeper inquiry. Often, the biggest threats are the ones you haven’t considered. That’s why asking the right questions across departments, systems, and processes is essential for surfacing blind spots.
Use these questions to prompt honest conversations with your leadership team, board, and finance committee:
- Access & Oversight
- Who has access to our financial systems and bank accounts?
- Are there any single points of failure in our processes (e.g., one person managing everything)?
- When was the last time we updated access permissions for staff, board members, or vendors?
- Internal Controls & Accountability
- Do we have a formal review process for large expenses and reimbursements?
- Are we following our internal financial policies, or do we need to revise or reinforce them?
- How do we ensure new employees or volunteers understand our financial protocols?
- Technology & Data Security
- Are we using up-to-date financial software with secure access and backup procedures?
- How often do we test our cybersecurity systems and educate staff on phishing or fraud attempts?
- Compliance & Legal Risk
- Are we consistently meeting all filing deadlines and reporting requirements?
- Do we have a shared calendar or workflow to ensure nothing slips through the cracks?
- Have there been any recent changes in laws or funder requirements that we need to address?
By using these questions as a starting point, you can begin mapping out your organization’s true risk exposure. Not just what’s obvious, but what may be quietly threatening your financial health behind the scenes.
If you need additional guidance for identifying financial risks, there are many checklists available online that you can follow and adapt to your nonprofit’s unique situation.
2. Assess & Prioritize Financial Risks
When you finish identifying the primary risks that could impact your nonprofit’s finances, you’ll probably end up with a long list. From here, you’ll need to prioritize the list so you know which risks to tackle first in your plan. Your highest-priority risks should be those that are most likely to occur and that would have the most severe consequences for your organization.
In most cases, the main effect your nonprofit would experience from a cybersecurity violation, incident of fraud, or theft is losing funding, whether it’s taken directly from you or lost indirectly through competition with a scammer. While these issues often involve a legal component that impacts your organization, the legal consequences are even more prevalent in cases of noncompliance. For example, if your nonprofit doesn’t file its Form 990 three years in a row, the IRS can revoke your tax-exempt status.
Additionally, don’t discount reputation damage as a significant consequence of risky financial situations. When your community finds out that your nonprofit has lost its funding or data, it can cause friction that impacts their trust in your organization.
3. Develop Mitigation Strategies
Now that you’ve assessed many of the negative financial situations your nonprofit could find itself in, it’s time to turn to the positive: how you can overcome the challenges you identified. Your mitigation strategies can be responsive or preventive, but the most effective risk management plans involve both.
Start at the top of your prioritized list of risks and work your way down to determine a solution for each one. Here are a few general ideas for each major type of financial risk we mentioned above to get you started.
Strengthen Cybersecurity to Protect Donor and Financial Data
In today’s digital landscape, a single breach can compromise sensitive donor information, disrupt operations, and erode hard-earned trust. Cybersecurity isn’t just an IT concern; it’s a financial and reputational risk that must be addressed at the leadership level.
To reduce your vulnerability:
- Work with trusted vendors: Choose fundraising and financial platforms with robust security certifications.
- Use access controls: Limit data access based on role and responsibility.
- Implement MFA (multi-factor authentication): Require secure logins across platforms.
- Update regularly: Keep all systems and software up to date to patch known vulnerabilities.
- Train your team: Conduct annual cybersecurity awareness training so staff and board members know how to spot phishing, fraud attempts, or suspicious activity.
Even small and midsize nonprofits are targets. A proactive cybersecurity strategy is one of the most effective financial safeguards you can implement.
Strengthen Internal Controls to Detect and Prevent Fraud
Fraud is one of the most damaging and often overlooked financial threats nonprofits face, and it’s not always malicious. Errors, oversights, and weak processes can lead to unintentional misuse of funds just as easily as deliberate deception.
The most effective way to reduce your organization’s exposure to fraud is by tightening internal controls. These are the systems and processes that safeguard your assets and provide accountability.
Key strategies include:
- Separation of duties: Avoid situations where one person handles all steps of a financial process, such as approving, recording, and reconciling payments.
- Dual authorization: Require two signatures or approvals for payments over a certain threshold.
- Regular reconciliations: Reconcile bank and credit card statements monthly to catch discrepancies early.
- Audit trails: Use software that logs all financial activity to create a verifiable record.
- Whistleblower policy: Encourage a culture of transparency by allowing staff to report concerns confidentially.
Board and finance committee oversight is critical. Fraud often goes undetected when no one is consistently reviewing the details. Build in systems that make accountability a shared responsibility.
Reduce Theft Risk Through Access Control and Accountability
Theft doesn’t always look like someone taking cash from a drawer. In nonprofits, it can show up in subtle ways: misuse of credit cards, unauthorized purchases, or the disappearance of equipment and technology. Whether intentional or opportunistic, theft often stems from inadequate oversight.
To minimize risk, focus on creating layers of access control and clearly defined accountability:
- Limit physical and digital access: Only give access to financial systems, sensitive data, or physical assets to those who need it to do their job.
- Implement inventory protocols: Track all equipment purchases, assign ownership, and conduct periodic audits of physical assets.
- Screen staff and volunteers: Include background checks and reference reviews in your hiring and onboarding processes, especially for those handling money or systems.
- Monitor purchasing activity: Use purchase order systems or expense management software that tracks spending in real time.
- Establish consequences: Make it clear that policy violations will be taken seriously, and document your process for investigating incidents.
It’s important to strike the right balance: protect your organization’s resources without creating a culture of distrust. Transparency and clear boundaries are key to preventing internal misuse while maintaining team morale.
Stay Compliant to Protect Funding and Tax-Exempt Status
Noncompliance may not always feel like an immediate threat, but the consequences can be severe. From losing your 501(c)(3) status to damaging grant eligibility and donor trust, failing to meet federal, state, or funder requirements can derail your nonprofit’s mission in a matter of months.
To protect your organization, create a compliance system that doesn’t rely on memory or a single staff member:
- Create a centralized compliance calendar: Include deadlines for IRS filings (like Form 990), state charitable registrations, grant reports, and policy reviews. Make it accessible to leadership and staff.
- Assign accountability: Every compliance item should have a clearly defined owner—whether it’s your CFO, executive director, or development team member.
- Review and update policies regularly: Ensure your bylaws, financial policies, gift acceptance policies, and HR manuals are reviewed annually and reflect current laws and practices.
- Train your team and board: Don’t assume everyone knows what’s required. Schedule annual compliance training to keep expectations clear and knowledge current.
- Conduct internal reviews: Even if a full audit isn’t required, periodic internal checks help ensure nothing falls through the cracks.
Your nonprofit’s financial professionals (accountant, bookkeeper, CFO, etc.) will be a strong resource for creating and implementing these strategies. However, for your plan to be effective, everyone at your organization needs to be on board and understand their role in executing it.
4. Consider Complementary, Proactive Measures
Alongside your formal plan, it’s also useful to brainstorm measures to improve your everyday financial practices that will also contribute to proactive risk management. These might include:
- Developing a diversified funding model that promotes reliable revenue streams like recurring donations, memberships, and annual events.
- Implementing or updating key fiscal policies that cover areas such as gift acceptance, expense reimbursement, and employee compensation.
- Encouraging open communication between teams to prevent silos from forming that affect decision-making.
- Conducting financial audits. While some organizations are required to do this for compliance, Jitasa’s nonprofit audit guide explains that even if audits are optional for you, they can still be valuable for understanding your financial situation and promoting accountability.
Incorporating some aspects of financial risk management into your nonprofit’s regular operations will help create a preventive mindset among your team, making it easier to catch and resolve issues before they cause significant consequences to your organization.
Financial risk management may not be the most pleasant aspect of nonprofit operations, but it’s essential to protect your organization’s reputation and ability to further its mission. Once you’ve developed your plan, let your community know about the steps you’re taking so they can be confident you’re doing everything in your power to keep their contributions safe.
