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Topic 1: Assessing financial health and risks

To plan and manage the financial health of your NGO, you first need to understand its current financial health and its potential financial risks.

The dynamic nature of funding sources, coupled with the diverse operational challenges, makes assessing financial health and risks a multifaceted endeavor. 

This section aims to provide a comprehensive overview of how your NGOs can effectively assess its financial health and mitigate potential risks. By understanding the intricacies of financial management within the nonprofit sector, your NGO can make informed decisions to enhance its financial resilience and operational effectiveness. By the end of this section, you should have a better understanding of financial sustainability and how to improve it.

How to assess financial health and risks

To plan and manage the financial health of your or a partner’s organisation you first need to understand its current financial health and risks to it. This chapter focuses on doing just that. After completion of this chapter, you have a much better understanding of the current state of your organisation’s financial sustainability and how to plan to improve it.

You will first have to get your organisation’s income and expenditure information, ideally from a profit and loss statement or similar (also often called revenue or income statement). A starting point might be the organisation’s annual report, though you likely need some more information from management beyond this.

Let’s start with some basic financial indicators that give us a sense of where the organisation is heading. As you read the below indicators, try to rate your or your partner’s organisational performance using each indicator.

Remember, it does not have to be perfect. Its a judgement call.

Some basic financial indicators that can give us a sense of the financial direction of your organisation are:

Now that we have a few indicators of financial health, let’s take a look at the main risks that NGOs need to be aware of:

To some degree, you can control and influence the above risks, unfortunately there are also financial risk that you have less control over. 

  1. Economic Changes: Just like how prices can go up or down when you go shopping, the economy can change too. If the economy isn’t doing well, people might not have as much money to donate, or governments might cut back on funding. NGOs need to be ready for these changes so they can adapt and still have enough money to run their programs.
  2. Unexpected Emergencies: Imagine if your computer suddenly broke down, and you needed money to fix it. NGOs can face unexpected emergencies too, like a natural disaster or a sudden increase in demand for their services. If they don’t have money set aside for emergencies, it can be hard for them to respond quickly and help those in need.
  3. Currency Fluctuations: Sometimes NGOs work in different countries where the currency is different. Changes in exchange rates can affect how much money they have. If the value of the currency they have drops, it means they might not have as much money as they thought. NGOs need to keep an eye on these changes to make sure they can still afford what they need.
  4. Fraud and Mismanagement: Just like how you wouldn’t want someone taking your allowance without permission, NGOs need to protect their money from fraud or misuse. If someone steals money or uses it in the wrong way, it can hurt the NGO and the people they’re trying to help. That’s why it’s important for NGOs to have good systems in place to keep their money safe and make sure it’s used for the right reasons.
  5. Dependency on Volunteers: While volunteers are amazing for helping out, relying too much on them can also be a risk. If an NGO depends too heavily on volunteers to do important tasks, like fundraising or managing finances, they might struggle if those volunteers leave or aren’t available anymore. It’s important for NGOs to have a balance between volunteers and paid staff to ensure stability and continuity in their operations.

Understanding and managing these additional risks alongside the previous ones can help NGOs maintain financial stability and continue making a positive impact in their communities.

The image below illustrates the steps involved in assessing the financial health of an NGO. Learn more about each of the ways to assess financial health and risks.

Regularly reviewing and reassessing the NGO’s financial health using these steps will help ensure its long-term viability and effectiveness in achieving its mission.

Watch the video to learn how to plan for financial health and resilience.

Assessing your organisation’s financial health and risks is an essential step towards achieving long-term stability and success. By regularly evaluating your financial position, you can identify potential vulnerabilities and take proactive measures to address them.

This process empowers you to make informed decisions, safeguard your resources, and mitigate risks that could otherwise jeopardize your mission. Remember, a comprehensive understanding of your financial landscape is key to navigating challenges with confidence and resilience. As you apply these insights, you will strengthen your organisation and position it for sustainable growth.