Weighing the Risks…Before It’s Too Late

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Jumping-off

precipice / istolethetv

 

Too many nonprofit institutions across the country are facing major financial hurdles that put their survival in jeopardy, but too few have systems in place to know just how close they are to the brink. Organizations such as Bridges for a Just Community in Cincinnati, Safe Faith United in Las Vegas, and Hull House in Chicago have closed their doors recently, displacing clients in dire need of supportive programs. Last year, Federation Employment and Guidance Service (FEGS), the largest human services provider in New York, collapsed after 80 years in operation, leaving 120,000 households without essential services.

Many more nonprofit organizations are currently running deficits or are barely breaking even, with little to no cash reserves. The loss of a major contract, a series of emergency building repairs, or a bad bet on Medicaid Managed Care could easily send them over the precipice and deprive hundreds of individuals, if not thousands, of services on which they depend.

Ironically, this lack of resources has a significant impact on their ability to focus on risk assessment and strategic planning. With few resources to devote to risk management, identifying short-term and long-term fiscal dangers early enough to address them can be challenging, but it is crucial that nonprofits make this a top priority.

The operating environment for human services providers is very high risk, with a mere 80 percent of program costs typically covered by their government contracts and very little if anything provided for overhead costs. With 90 plus percent of their budgets being funded in this way, it is not hard to understand why these organizations are in a perpetual game of catch up. However, human services executives and boards must recognize these pitfalls of the operating environment in which they work and incorporate risk assessment into their management approach.

Our report from March 2016, New York Nonprofits in the Aftermath of FEGS: A Call to Action, was crafted in response to this wave of nonprofit closures. It lays out a number of recommendations for strengthening the nonprofit human services sector including the need for organizations to develop platforms for risk analysis.

Providers and their boards must accept responsibility for aggressively identifying, assessing, and addressing risks to their fiscal health and put in place the checks and balances needed to protect themselves and the people they serve. Assessments should include the consequences of scenarios requiring scaling back or closing programs, analyzing true costs against government contract reimbursement rates, examining existing staff and infrastructure to determine if they are sufficient to fulfill contract demands, ensuring programs are consistent with their mission, and that performance metrics are realistic and achievable.

At the same time, funders, both private and public, must support the ability of nonprofits to invest in risk assessment systems, including technology and staff, by covering the real costs of running a program. Funders must underwrite the development of monitoring systems and training that allow providers to track key performance indicators tailored to their specific organizations, and recognize these as part of program costs.

Not only will proper risk management help stop the flood of organization closures occurring year after year, but it will also give providers the freedom to explore innovative new programs and delivery mechanisms. With the proper platform in place, organizations will be able to measure the impact of current programs and can take measured risks to determine the best ways to serve communities.

If we want to continue to rely on nonprofits for the delivery of services to communities that help maximize human potential and ensure well-being, funders must support the real costs, including oversight and risk management systems, and nonprofits need to understand and manage for the very high risks associated with government contract work. This is vital for guaranteeing the fiscal sustainability of the sector and for giving nonprofits a sound foundation from which they can innovate and grow. We must take these steps—not because individual nonprofits themselves should survive, but because the programs they deliver provide a lifeline to countless individuals across the country.

  • Mathieu Despard

    Great article. I like how the authors blended both financial and community impact factors. The idea of developing a risk assessment system may be a bit elusive for some nonprofits, but I think there are 2 simple steps nonprofits can use: 1) look at the 3 or 5 year trends for revenue, expenses, and unrestricted net assets using data from financial statements and a line graph in Excel. The board and senior managers can eyeball the general trends – particularly the extent to which UNA is being drawn down due to recurring operating deficits. And 2) look at the extent to which each cost center covers its full costs to a) determine how much fundraising or cross-subsidy is needed and b) identify ways to increase cost recovery. This 2nd point is derived from Bell, J., Masaoka, J., & Zimmerman, S. (2010). Nonprofit sustainability: Making strategic decisions for financial viability. San Francisco, CA: Jossey-Bass.