Top Tips 24
How to carry out a Risk Assessment
It is important for all NGOs, large or small, to assess and then manage financial risks facing the organisation. Significant financial risks that are not actively managed could threaten the NGO’s operations and financial security.
This Top Tip covers how to complete a financial risk assessment and shares some practical tools that you can use.
Who should do a risk assessment?
The trustees (ie Board members) are responsible for ensuring that a risk assessment takes place regularly. It is often best done by a group of people including board members and management, say once a year. This will ensure ownership of the results and a greater awareness in the team of the potential threats.
Your auditors may also be able to help or advise.
What does risk assessment involve?
There are four stages in the risk assessment process:
At each stage in the process you should record your work on a risk register - see Mango's Guide for an example risk register.
Financial risks or threats to your resources can come from inside your NGO or from external factors. Generally, internal risks (such as theft or fraud) are easier to identify and can be managed successfully with robust internal control procedures.
It is a good idea to use Mango's Finance Health Check to assess your financial systems. This will help to reveal internal control weaknesses.
You can also use a financial ‘SWOT’ analysis to identify financial strengths and weaknesses (internal factors) and opportunities and threats (the external factors).
External risks are potentially more serious and more difficult to manage.
Each of the external threats you identify could result in a potential risk. For example, a typical threat is an unstable foreign exchange rate. The related financial risk would be an exchange loss on a donor grant due to an adverse exchange rate. This could mean that the NGO would not have enough funds to run a project.
Each risk is classified according to how serious it would be for the organisation if it did happen (would the impact be critical, major, or manageable?). It is also classified according to the likelihood of occurrence (is it likely, possible or remote?).
The risks the trustees and managers need to be most concerned about are those which would have a critical or major impact and are quite possible or likely to occur.
For example, suppose your budget is in a local currency which is unstable against the US Dollar and a major donor pays their grant in Dollars. The risk of losing funds due to an exchange rate loss could be both be critical and likely.
For serious risks, you must put together an action plan to reduce the likelihood of the risk occurring or to lessen the impact if it did occur.
For example, prepare your budgets and hold your money in a stable foreign currency to protect the value of external donor funds received. Also, consider ways to diversify your income so that you are not reliant on just one or two major external donors.
Risk assessment should not be a one-off event.
The financial risks your organisation faces will change over time. The decisions taken to reduce the risks may or may not be properly implemented. The actions taken may or may not be effective in reducing the risk. It is important to keep reviewing the situation. A practical way to do this is to maintain a risk register, which is then regularly reviewed at Board meetings.
Want to learn more?
Mango’s Training Course Getting the Basics Right includes a day on internal controls, as well as keeping accounts, budgeting and financial reporting. Our course - Planning for financial sustainability - also covers how to assess and manage strategic risk.
View our calendar of courses around the world here: www.mango.org.uk/training/opentrainingprogramme
See Mango’s Guide to Financial Management for NGOs for free advice and tools, including Mango's Health Check and a sample risk register. See: www.mango.org.uk/guide.
Mango: All about Money and NGOs
Mango helps NGOs to make more of their money by: running practical training, supporting people in finance roles, advising NGOs and donors, and publishing free tools and guides: www.mango.org.uk