How to Assess and Manage Financial Risks in Nonprofits

January 14, 2026

How to Assess and Manage Financial Risks in Nonprofits

For nonprofits, financial stability enables mission stability. When you have a sustainable financial foundation, you can better pursue and maintain programming that serves your community.

Many factors can affect your organization’s finances and cause uncertainty. While you can’t avoid every potential risk, you can make a plan to prepare your team. In this blog post, we’ll walk through strategies for assessing and managing financial risks to keep your mission financially viable.

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1. Conduct a risk assessment.

You need a system for identifying potential threats to your organization’s financial health before they spiral into larger issues. Start by brainstorming the most evident risks with your finance committee, leadership, finance staff, and program staff. In addition to your available financial resources, you should also consider:

• Internal factors like staff turnover, outdated software, and internal controls
• External factors like government policy, donor fatigue, and economic volatility

Then, use a risk matrix to categorize each risk based on its likelihood and potential impact. This process helps you prioritize risks. For example, if you start fundraising in a new state but forget to complete that state’s charitable solicitation registration, you may incur fines and reputational damage due to a lack of compliance.

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2. Monitor cash flow and liquidity.

One of the most threatening financial risks your nonprofit can face is not having enough cash to cover its expenses—also known as liquidity risk. Low liquidity means you may be unable to pay your bills on time, compensate your staff, and support your programming.

To help your team monitor cash flow and liquidity, leverage these tactics:

• Continuous cash flow forecasting. While your budget tells you your projected revenue and expenses, it doesn’t necessarily reflect your nonprofit’s currently available financial resources at any given moment. By implementing rolling cash flow forecasts and updating them weekly, you can identify potential cash shortfalls in advance, allowing you to adjust your strategy or incorporate new lines of credit. Work with a nonprofit financial management professional if you need help setting one up.
• Operating reserve maintenance. Your operating reserve can be a lifeline for your nonprofit, but only if you consistently build and maintain it. Make a goal for how much should be in your operating reserve, and set a timeline for building this fund. Most organizations aim to have at least three to six months of operating expenses in reserve. You should also develop a policy outlining when and how you can access these funds.
• Restricted vs. unrestricted cash analysis. Even if your bank balance seems high, you may still not have enough cash to cover your expenses if a significant portion of your funding is subject to donor or funder restrictions. Separately tracking and regularly reviewing your unrestricted net assets gives you a better idea of how much you have available to handle operating costs.

In addition to these tools, your nonprofit Statement of Cash Flows reports on the cash flowing in and out of your organization over time and can help you manage liquidity and improve your decision-making.

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3. Strengthen internal controls.

Strong internal controls protect your organization from risks like fraud and human error. YPTC’s nonprofit accounting guide recommends strengthening your internal controls by:

• Separating financial responsibilities. Distributing financial responsibilities among your team ensures no one person has too much control over your finances. For instance, you should have one staff member record financial transactions and another approve them.
• Implementing clear financial policies. Develop policies that govern areas of financial management like expense approval, cash handling, payroll processing, budget management, and financial reporting. These policies should be readily available for all staff to reference. For example, you may link to these procedures in your employee handbook.
• Conducting physical asset checks. Don’t forget about physical assets like cash, checks, and office equipment. Store all cash and checks in safes or locked cash boxes, and create an asset register for items like computers and cell phones.

Additionally, consider mandating dual signatures for all payments above a certain threshold. This requirement limits staff members’ influence and helps catch errors.

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4. Diversify revenue streams.

Relying too heavily on one funding source creates vulnerability, especially during a time when federal funding is limited. The more revenue streams you have, the more resistant your organization will be to shortfalls in any one source.

To diversify your revenue strategy, start by calculating your dependency ratio, or the percentage of your budget that comes from your top three funding sources. If any one source comprises more than 20-30% of your revenue, you may be too dependent on that stream. 

Developing a diversification plan can help you take advantage of other revenue streams and grow smaller revenue sources you may already have in place. Additional revenue streams may include in-kind donations, earned income, and investment returns.

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5. Create a financial review routine.

Regular financial reviews ensure you identify and address risks as quickly as possible. Schedule quarterly finance committee meetings that focus on risk areas that may pose a threat to your nonprofit. For instance, one quarter you may dive deeper into cybersecurity, while another quarter focuses on insurance coverage.

Along the way, monitor key performance indicators (KPIs) in a financial dashboard that summarizes crucial information for your board and leadership. Potential KPIs include months of cash on hand, current ratio, and budget variance. A condensed, visual representation of these data points can help stakeholders analyze imminent risks and act on them accordingly.

While your most pressing financial risks may change over time, a comprehensive risk management strategy allows you to stay on top of threats and mitigate them. Since financial risks can come from many different areas of your organization, involve as many team members as possible in the risk management process to ensure you incorporate various perspectives and uncover potential risks before they become larger issues.