Effective risk management is vital for charities. It helps to safeguard the charity’s reputation and assets and ensures it fulfils its purpose. However, the risks that charities face today are more complex than ever, ranging from financial uncertainty to regulatory compliance to safeguarding beneficiaries and environmental challenges. Managing these risks requires a proactive approach, clear strategies and strong governance.
This guide will explain the essential steps and practical tools charities can use to manage risk effectively. Whether you’re facing operational, financial, or reputation risks, understanding how to identify, assess, and mitigate them will help you protect your charity and keep it on track.
What Is Charity Risk Management?
To put it simply, charity risk management involves identifying, evaluating and addressing risks that could impact a charity’s operations, assets, reputation and overall goal. The trustees of a charity are responsible for ensuring these risks are managed efficiently.
Why Is Risk Management Important For Charities?
Risk management is vital to safeguard a charity’s financial stability, assets, reputation and compliance with legal obligations. Having an effective risk management framework in place allows charities to anticipate any issues, reduce the risk of losses and protect the organisation.
What Are The Main Types Of Risks That Charities Face?
The risks that charities can face vary depending on the size, nature and activities the organisation undertakes. Generally, the larger or more complex the charity, the more difficult it is to identify potential risks and put systems in place to manage them.
It can be useful to classify key risk areas to plan effectively. Generally, risks for charities tend to fall into one of seven categories:
1. Governance
Poor governance can impact decision-making and the overall effectiveness of the charity. Risks can include high board turnover, conflicts of interest or trustees not fully understanding their responsibilities.
Example: A trustee failing to understand the charity’s legal obligations or a charity having no defined policies in place could lead to governance failures, threatening its reputation and operations.
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2. Strategic
Strategic risks may arise when a charity’s strategy doesn’t align with its resources or objectives. For instance, launching a new project without understanding the financial or operational demands could fail.
Example: A charity may overestimate the funds required for a service, leading to unsustainable operations.
3. Compliance
Charities are subject to many legal and regulatory requirements. Non-compliance with charity laws, employment regulations or health and safety laws can result in fines, legal challenges and reputational damage.
Example: A charity failing to meet data protection regulations could be fined or sued for breaches in sensitive information.
4. Operational
These include risks related to day-to-day operations, such as employee and volunteer availability, physical damage to premises and gaps in contingency planning.
Example: If a charity relies on volunteers for a key service but lacks a plan for staff absences, it risks service disruption.
5. Financial
Financial risks can include poor financial management, failure to meet reporting requirements and the inability to maintain reserves.
Example: Missing deadlines for funding applications or failing to accurately assess the financial viability of a project can jeopardise the charity’s finances.
6. Environmental
External risk factors fall outside the charity’s control and can impact its operations. This may include changes in government policy or negative publicity.
Example: A government policy change impacting employment schemes could directly impact charities that rely on funding for their operations.
7. Reputational
Reputation is vital when it comes to a charity’s ability to secure funding, especially considering many charities rely on donations and legacies as one of their main sources of income. Additionally, a positive reputation can help attract volunteers and encourage public support. Poor decisions or associations can damage the charity’s image and diminish trust.
Example: Accepting donations from controversial sources or a scandal involving senior leadership can severely impact the charity’s standing with stakeholders.
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How Can Charity Trustees Manage Risk?
Charity trustees have a very important role in ensuring that risks are managed effectively to protect the charity. Here are some key strategies trustees can adopt for better risk management:
1. Develop A Risk Assessment Framework
This involves regularly identifying, assessing and reviewing potential risks that could impact the charity’s operations. Trustees need to create a structured approach to prioritising these risks, evaluating both their likelihood and potential impact. Once identified, appropriate actions must be determined to mitigate each risk.
2. Have Insurance In Place
Trustees should ensure the charity holds the necessary insurance, such as employer’s liability and motor insurance if applicable. Additionally, charities should consider other forms of insurance to fit their activities, such as property, event or public liability.
3. Implement Governance Best Practices
Strong governance can reduce risks related to decision-making and legal compliance. Trustees should ensure they follow the charity’s governing documents and have policies in place to tackle conflicts of interest and carry outboard reviews, alongside other governance issues.
4. Financial Controls
Trustees should maintain robust systems for financial oversight, such as regular financial reporting, budget reviews and ensuring adequate reserves are in place to cover unforeseen challenges. This will help the charity remain financially sound, even when faced with risks.
5. Crisis Management Planning
Contingency plans must be prepared for operational disruptions or reputational risks. These may include media enquiries and staff absences. Having these strategies in place allows for quick and effective responses in times of crisis, minimising potential damage.
Related Reading: What Are The Principles Of Risk Management In The Public Sector?
How Can Veriforce CHAS Help with Charity Risk Management?
CHAS client services can be a valuable tool for charities by helping them manage risks associated with their supply chain. By partnering with CHAS, charities can gain access to a database of pre-qualified contractors who have been assessed against a range of risk factors, including health and safety, financial stability and environmental practices.
This can significantly reduce the time and resources required for charities to vet potential suppliers, allowing them to focus on their core mission. Additionally, CHAS provides ongoing monitoring of its registered suppliers, which helps to ensure that they continue to meet the required standards.
Here are some of the specific ways that CHAS client services can help charities manage risk:
- Reduced risk of procurement fraud: By using CHAS to verify the credentials of potential suppliers, charities can reduce the risk of fraud or malpractice.
- Improved compliance: CHAS membership demonstrates that suppliers comply with relevant health and safety and environmental regulations.
- Enhanced reputation: Partnering with reputable suppliers can help charities build trust with donors and stakeholders.
- Streamlined procurement process: CHAS provides a centralised platform for finding and vetting potential suppliers, which can save charities time and money.
CHAS client services can be a valuable tool for charities that are looking to improve their risk management practices, particularly those related to procurement and supply chain compliance.
Charity Risk Management FAQs
What are the legal requirements for risk management in charities?
Charity trustees are legally responsible for safeguarding the charity’s assets and ensuring it operates within the law. This includes managing risks related to governance, finances and operations.
How often should trustees review risk management strategies?
Trustees should regularly review their risk management strategies, ideally annually or more frequently if significant changes occur within the charity or its operating environment.
Can insurance cover all the risks a charity faces?
No, while insurance can mitigate the financial impacts of certain risks, such as property damage or liability claims, it cannot cover reputational damage or strategic failures. Effective risk management involves a broader approach beyond just insurance.
What should a charity do in the event of a reputational crisis?
A charity should have a crisis communication plan in place that outlines how to respond to media inquiries, manage social media and communicate transparently with stakeholders to minimise damage.
How can small charities manage risk without extensive resources?
Small charities can manage risk by focusing on the most critical areas, such as governance, compliance and financial management. Trustees can also seek free or low-cost training on risk assessments and utilise resources from charity regulators or other support organisations.
What tools are available for risk management in charities?
Charities can use various tools, such as risk assessment templates, insurance guides and compliance checklists, to assist in managing risk effectively. Organisations like The Charity Commission also provide resources for risk management.
Risk is one of the many cogs involved in running a charity. However, with proactive management, trustees can ensure that potential risks do not derail their organisation’s mission. Effective risk management ensures that charities can continue to support their causes while protecting their assets, reputation and long-term sustainability.
Ready to take control of your charity’s risk management? When you join Veriforce CHAS, managing and mitigating risks across your charity has never been easier. Our risk management solutions can help you stay compliant with regulatory requirements, protect your reputation and ensure effective governance.
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