Risk Management

It is generally agreed that one of the primary purpose of a nonprofit board is to ensure the longevity of a nonprofit’s mission. Many nonprofit boards interpret this to mean minimizing decision-making risk.

The desire to minimize risk is often translated into risk avoidance or risk intolerance which promotes the status quo and minimizes growth.

Responding to inflation (increasing the budget by 3% a year) is seen as risk free and adequate growth. It is seen as a necessary and safe goal. However, it overlooks a critical data point: service population growth.

In our area, the population grows at about 1.5% per year. Inflation averages about 3% per year historically. Put those facts together you realize that the average nonprofit must grow at 4.5% per year just to stand still.

Nonprofits that serve the same number of clients each year are serving a smaller percentage of the population. That is fine if the social problem your mission addresses is shrinking. However, most social problems are growing at least as fast as the population. The implication is that if a nonprofit grows slower than its service population, it risks becoming irrelevant. One of the indicators of irrelevance is increased fundraising difficulty, which translates into lower sustainability.

Just growing at 4.5% per year is status quo. For many donors, staff members, community representatives, board members, volunteers, referral sources, and advocates, the status quo is uninspiring. The uninspired are less loyal, generous, and passionate. Nonprofits want increasingly loyal, generous, and passionate supporters.  In addition, it is hard to have engaged board members if they are uninspired.

Risk mitigation implies growing at greater than 4.5% per year, in this example, since there is a greater risk of failure if a nonprofit grows at a rate of 4.5% per year or less.

Next Step:

Determine the service population growth-rate for your mission

Determine an appropriate annual growth-rate over the minimum (inflation plus service population growth)

Create a plan to meet your annual growth-rate

It is important to note that this approach only addresses the risk associated with meeting population demands. The other critical risk factor is innovation.

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