Discover essential guidelines for nonprofit risk management budgeting, tailored for every size. Optimize resources to protect and advance your mission.
As a nonprofit leader, it’s important to consider how much to spend annually on risk management. There is no one-size-fits-all answer, but here are some guidelines and additional considerations:
Small Nonprofits (Budget under $1 million):
Typical Range: 1-3%
Reasoning: Smaller nonprofits often have less complex operations, but they also have fewer resources to handle risks. It is crucial for these organizations to invest in basic risk management infrastructure and insurance, even if it means relying on part-time or outsourced expertise.
Medium Nonprofits (Budget $1 million to $5 million):
Typical Range: 0.5-2%
Reasoning: As nonprofits grow, they may benefit from certain cost advantages in terms of managing potential risks. However, they begin to face more complex risks and thus should invest in more sophisticated risk assessment tools and possibly a dedicated risk management professional.
Large Nonprofits (Budget $5 million to $20 million):
Typical Range: 0.3-1%
Reasoning: Larger organizations are likely to have more complex operations and a higher risk exposure, but they also have greater capacity to absorb and manage risk internally. Investment should be sufficient to support comprehensive risk assessments, internal controls, dedicated staff, and more complex insurance coverage.
Very Large Nonprofits (Budget $20 million to $100 million):
Typical Range: 0.2-0.8%
Reasoning: At this scale, nonprofits can often integrate risk management into various operational roles and may benefit from in-house risk management teams. Investments might focus on technology solutions to manage and monitor risks.
Nonprofits with Budgets over $100 million:
Typical Range: 0.1-0.5%
Reasoning: The largest nonprofits often operate similarly to large businesses and can leverage significant economies of scale. Their risk management costs as a percentage of the budget can be lower, but in absolute terms, the investment is substantial, covering sophisticated enterprise risk management (ERM) systems, compliance, and internal audit functions.
Key Considerations Across All Sizes:
Risk Profile: The nature of the nonprofit’s activities can dramatically affect risk levels. For example, organizations working in disaster zones or with vulnerable populations may need to invest more in risk management.
Regulatory Environment: Nonprofits operating in heavily regulated areas or in multiple countries may require a larger budget for compliance and risk management.
External Factors: Changes in the external environment, such as new legislation or economic shifts, may necessitate increased investment in risk management.
Past Incidents: Organizations that have experienced significant risk events in the past may decide to allocate more budget to risk management to prevent recurrence.
Additional Considerations:
Nature of Activities: If the nonprofit operates in high-risk areas (like conflict zones) or sectors (like healthcare), the percentage should be on the higher end of the scale.
Regulatory Requirements: Those operating under heavy regulations may need to allocate more to ensure compliance.
Operational Complexity: More complex operations with diverse revenue streams, large staff, or significant property holdings should allocate more to manage these risks effectively.
Past Experiences: Nonprofits that have encountered significant risk events may increase their risk management budget to bolster their resilience.
Conclusion:
Ultimately, the right percentage of the budget for risk management is the amount necessary to effectively manage the risks identified in the nonprofit's risk assessment process. It should be enough to protect the organization's assets, reputation, and ability to pursue its mission, without diverting excessive resources from core programs and services. As a nonprofit grows and its risk landscape becomes more complex, the sophistication and investment in risk management should evolve accordingly. It is also vital to regularly review and adjust the risk management budget in response to organizational changes and shifts in the external environment.
Risk Alternatives provides training and support for organizations that want to improve their resilience, sustainability, and growth. For more information, email info@riskalts.com or call 608-709-0793