In a previous video we defined risk for nonprofits in order to establish a good financial plan.
Every risk has two important features:
Severity and Likelihood
Severity describes degree of pain, loss or pressure that results from a particular risk. And it could be measured in lots of ways: money, health, reputation, time. You name it: if it can be lost, it’s a way to measure risk severity. Low severity risks can be a minor inconvenience while high severity risks could bring irreversible damage or collapse an organization.
Likelihood describes the probability or frequency a risk will occur over a specific time period. Low likelihood risks happen very rarely, while risks with very high likelihood occur constantly.
Combining risk impact and risk likelihood into a matrix can help an organization prioritize which risks is should address.
Plot Likelihood on the bottom from “Rare” to “Certain” and Severity on the left-hand side from “Negligible” to “Catastrophic”.
Risks that land in the red area of the plot should be addressed first. These are risks that are potentially severe AND have a high likelihood of occurring. For example, the risk of injury or loss of life while working in a war-torn city.
Risks that land in the amber area of the plot are next to be considered. These risks are potentially severe but have a lower chance of occurring or have a smaller financial or operational impact but are almost certain to occur. For example, fraud or fundraising errors.
By analyzing risks by their Severity and Likelihood, the organization can take a planned and deliberate approach to managing risks without having to guess what makes the most sense from a financial, time or mission perspective.
Talk to the financial experts at Fairlight Advisors to learn more about managing your nonprofit’s investments. Schedule a free consultation today!