Tolerance for Risk

The board sets the risk tolerance of the organization. The risk equation used to guide assessments is:

Gross Risk - Implemented Policies - Transferred Risks = Net Risk

The board, directly or through staff, identifies the myriad risks. It also assesses the impact those risks could have on the organization. Internal risk mitigators such as policies and procedures are then identified. Risk can also be transferred externally, for example, by obtaining insurance. The remaining risk is the net risk facing the organization.

While the board is responsible for considering all risks, financial risks are a particular area of emphasis for the board.

While the board is responsible for considering all risks, financial risks are a particular area of emphasis for the board. The board’s finance committee is often responsible for oversight of general and financial risks for the board. Key risks and issues are passed to the full board for consideration.

The Finance Committee

What are the key risks the finance committee should consider?

• Decision-making risk

Inaccurate or unrealistic budgeting and forecasting, causing poor financial decisions, missed opportunities, or wasted resources.

• Profitability risk

Insufficient or unstable revenue and funding sources, affecting the ability to meet financial obligations, sustain operations, or pursue strategic goals.

• Compliance and regulatory risk

Non-compliance or violation of applicable laws, regulations, standards, or contracts, resulting in legal penalties and/or reputational damage.

• Asset and liability stewardship risk

Loss, damage, or misuse of the organization’s assets, or the risk of unexpected or excessive liabilities, harming the organization’s financial position, liquidity, or solvency.

• Technical financial risks

Includes risk of changing interest rates, financial market returns, foreign exchange rates, and commodity/commodity-like risk.

The Finance Committee has many tools available to assess and the effectiveness of financial risk management. These include:

• Financial statements

Analysis identifies potential risks or weaknesses in a company’s financial position, such as high debt levels, low liquidity, poor profitability, or inefficient operations.

• Ratio analysis

Techniques such as ratio analysis, trend analysis, and benchmarking analysis of financial statements help measure and evaluate different types of risks.

• Accounting policy manuals

These guide financial operations and typically cover established internal controls, systems and processes for consistency of reporting, legal/regulatory compliance, and general standards for financial reporting. Multiple policies contained within are sufficiently important that they rise to the board or finance committee level for review.

• Audits and reviews by external parties

Auditors, regulators, or tax authorities can help ensure the reliability, comparability, and transparency of financial information.

• Insurance

Insurance can protect the balance sheet and minimize fluctuations in earnings.

Tips for Your Finance Committee

Here are a few tips for effective practices for your finance committee:

• Recruit to the board the necessary functional expertise for a strong finance committee
• Ensure the CEO appoints a strong CFO
• Set the finance committee agenda to cover the panoply of general and financial risks over a one-to-three-year cycle
• Get expert help if needed to support risk reviews
• Investigate significant breakdowns and whistleblower items and learn from them
• Ensure the risk management system design matches organization complexity

Even if the board entrusts the heavy lifting to the finance committee, it is still each director’s responsibility to exercise the duty of care. Trust is based on competence; the more competent the finance committee, the more the board has confidence in delegating the financial risk management.

The prize of excellent financial risk management is the increased ability of the board and organization to lead more boldly, trusting God’s plan for the ministry.

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Caryn Ryan is Founder and Managing Member of Missionwell LLC, which provides a virtual business office service to churches, ministries and non-profits and offers accounting, financial, payroll, HR and corporate support services and consulting. Caryn can be reached by email at caryn@missionwell.com and via the web at Missionwell.com.

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