5.1 Financial risk and voluntary management

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Managing financial risk is often a difficult area for voluntary management committees. They are responsible for ensuring that public money is used for public benefit and that the good name of a voluntary organisation, often built up over many years, is not tarnished by financial mismanagement or malpractice. Yet any form of growth and development carries an element of risk, and failure to adapt to changing circumstances is a major risk. With tight internal procedures and effective planning, unnecessary risks can be minimised, and risks necessary for growth and development can be managed with confidence and care.

What are unnecessary risks and how can they be minimised?

Risk of fraud or mismanagement

Responsibility for minimising this risk lies with voluntary management committee members. It is essential that they understand their financial responsibilities and:

ensure proper budgetary control as part of strategic management.
ensure staff to whom financial authority has been delegated. have sufficient skills and training to fulfil their remit.
ensure effective procedural checks are embedded in day-to-day processes. and are regularly reviewed (many organisations develop a financial procedures manual and associated training for this purpose)
ensure they make appropriate checks on committee members (it is good practice to have police disclosure checks conducted for all committee members, but particularly important for those with responsibility for finance)

Risk of loss of income

Planning can alleviate this risk by, for example:

diversifying income sources to minimise the impact if one source dries up.
consider not only a mix of funding sources but also of funding type. Also consider long-term risks to funding, e.g., the impact of European Union enlargement, and how you will prepare to address them.
contingency planning for loss of specific funding.
developing reserves.
staggering funding applications and re-applications, to ensure that these do that these not all happen in the same year.
managing fixed costs – if your operation is vulnerable to external change, it is wise to keep fixed costs, such as permanent staff, low.
plan for a flexible organisational structure that can scale up, and down, as circumstances require.

Risk of unexpected costs

Such risks can often be transferred by taking insurance. It is important to check the terms of cover carefully, review all insurance annually and ensure cover is adequate for the level of risk for your organisation. Some kinds of insurance are compulsory, in particular buildings insurance and employers’ liability insurance. It may also be wise to insure:

volunteers – to the same level as paid staff
equipment – against fire, flood, theft
events – functions including large numbers of people, alcohol etc.
advice – to address the risk of legal action for negligent advice
key people – where you are depending on the skills of specific staff to carry through business plans and generate income

Risks in your wider operating environment

Changes in the law, change of government, and social, environmental, and economic change can all impact on your organisation financially. Such risks are best anticipated and managed through strategic planning.

Personal financial risk to voluntary management committee

This is minimised by ensuring an appropriate organisational structure. If the financial risk is high company status may be worthwhile to limit liability. Where an organisation uses loan finance personal guarantees can and should be avoided.

Risks associated with organisational growth and development

Growth risks include:

Risk that a new trading venture will not succeed
Risk that the organisation is unable to deliver on a service delivery contract
Risk that demand for your service will outstrip your capacity to deliver

An essential stage in any growth and development is strategic planning, including risk assessment and risk management. This process will help you identify solutions, for example, establishing a trading subsidiary to contain trading related risks. You should also consider how to manage your finances in a period of growth.