There are millions of exceptional nonprofit organizations around the globe, tirelessly working day and night to make this world a better place. They tackle issues ranging from environmental conservation to human rights and everything in between. As a grantmaker, you’ve been given immense privilege and the hefty responsibility of supporting numerous such organizations. Your role involves providing financial assistance and believing in their missions and visions for social good. By aligning your resources with their projects, you’ve played a crucial role in fueling their efforts to create positive societal change. However, with great power comes great responsibility, and part of your responsibility as a grantmaker is to manage risk.

However, it’s important to acknowledge that, on occasion, challenges may arise. Sometimes, an individual might make an honest mistake or fail to adhere to the specific stipulations of a grant. More rarely, a malicious actor might intentionally attempt to undermine your efforts. This could take the form of someone posing as a legitimate grantee to access funds deceitfully, or it might involve someone directly stealing from an organization you support.

Even though these instances are relatively rare, their potential impact cannot be understated. Therefore, your grantmaking organization must remain vigilant and prepared. A comprehensive approach is necessary to mitigate risk throughout your grant cycle effectively.

In this guide, we’ll explore the concept of risk management in grants and how you can ensure that your grantmaking process is robust, efficient, and effective.

Understanding Risk Management

Risk management is known as the most crucial aspect of any organization’s operations and becomes even more critical when it comes to grantmaking. As a grantmaker, you are dealing with public funds, including federal funds, entrusted to you by the federal government. Your primary goal is to ensure that these funds are used effectively and responsibly to achieve your organization’s mission. This involves identifying potential risks, assessing their likelihood and impact, implementing strategies to mitigate them, and moreover monitoring and evaluating the effectiveness of those strategies continuously.

Risk management is the most crucial element that must be implemented throughout the entire grant cycle – from pre-award assessment and due diligence to post-award monitoring and evaluation. By proactively addressing potential risks, you can protect your organization’s reputation, uphold donor trust, and ultimately ensure that the intended impact of your grants is realized.

Identifying Risks

Identifying all potential risks that could arise during the grant cycle is the first step in risk management. There are three main areas where these risks can be categorized into financial, operational, and reputational. Financial risks involve the potential loss or misuse of funds. Operational risks pertain to administrative processes and systems that could fail or be inadequate. Reputational risks refer to damage to your organization’s reputation, credibility, or public trust

To identify these risks, thorough due diligence on potential grantees before awarding funds is essential, including risk analysis to deal with various financial risks through documentation of procedures, financial control, supervision, legal review, emergency cash reserves, and insurance. This includes reviewing their financial statements, conducting site visits, and checking for red flags or past issues. It’s also crucial to have open lines of communication with grantees throughout the grant cycle to monitor potential risks.

Assessing Likelihood and Impact in the Risk Assessment Process

After identifying potential risks, the next step is determining their likelihood and potential impact. This involves evaluating the the severity of its consequences along with probability of its occurring. Some risks may be more likely to occur but have a lower impact, while others may have a higher impact but are less likely to happen.

You can use different tools such as risk matrices or decision trees to assess likelihood and impact. These provide a visual representation of risks and help prioritize which risks require immediate attention and which can be managed in the long term.

Mitigating Risks

Once you’ve identified and assessed potential risks, it’s time to implement strategies to mitigate them. This could involve setting up internal controls, establishing clear policies and procedures, conducting regular training for staff and grantees, or creating emergency backup plans. It’s crucial to involve all stakeholders in this process and ensure everyone knows their role in mitigating risks.


Reduce Risks with Grant Funds by Understanding Your Grantees

A deep understanding of your grantees is key to making well-informed decisions that can significantly impact both parties. It involves more than just establishing relationships with the organizations you support; it’s about delving deeper into their operations, goals, and capabilities and carefully read all grant agreements. Especially when dealing with new applicants, requesting specific documents that shed light on their work and ethics is critical.

To facilitate a thorough due diligence process, here’s an expanded list of essential data that grantmakers should collect:

  • Compile a comprehensive list of all board members to ensure there are no conflicts of interest that could jeopardize the organization’s integrity.
  • Obtain the Internal Revenue Service (IRS) Determination Letter, a crucial document that confirms the organization’s recognition by the IRS as a legitimate entity.
  • Reviewing IRS Federal Form 990 is vital in verifying the organization’s compliance with IRS filing requirements and ensuring transparency and accountability.
  • Examine audited financial statements with a keen eye to accurately assess the organization’s financial health, identifying areas of strength and those needing improvement.
  • Analyze the organizational budget in detail to gain a deep understanding of the financial strategy for the current fiscal year and to plan effectively for future fiscal years, ensuring sustainability and growth.

Evaluating the grantee’s approach to managing unexpected revenue shortfalls or budgetary excesses is essential. When structuring your application, it’s advisable to include an open-ended question that delves into their contingency plans for such financial discrepancies. This provides insight into their financial prudence and prepares you for a more in-depth discussion on this topic in future interactions. Considering the unpredictable nature of funding and expenses, clearly understanding their strategies can significantly influence your decision-making process.

Enhance Internal Control Among Grantees

Well-managed organizations strictly adhere to established best practices, ensuring consistency and security through meticulously designed internal controls. These practices are critical for maintaining an efficient and secure operational framework. It is common for your seasoned grantees, with their wealth of experience, to have these essential procedures well-documented and integrated into their daily operations. However, it is always prudent to confirm the existence of these critical procedures. In cases where they still need to be established, offering your assistance in their development and implementation can be immensely beneficial. This proactive approach ensures the robustness of their operational processes and reinforces a culture of continuous improvement and adherence to industry standards. Understanding and implementing cost principles is a key component of the financial management standards that grantees should be aware of, especially in the context of complying with uniform administrative requirements, which play a crucial role in ensuring adherence to federal regulations.

Here are several internal controls that your grantees ought to implement:

Formal Guidelines and Standard Operating Procedures

It’s crucial to ensure that your grantees have well-documented and defined methods for managing and tracking the funds they receive. This will facilitate transparency and enhance the efficacy of the granted resources. To achieve this, consider posing several pointed questions to potential grantees. These inquiries can be strategically incorporated into the application process or brought up during a follow-up discussion. This approach allows you to gauge their readiness and capability to handle the funds responsibly and effectively.

  • Who in your organization has the authority to approve grant expenditures, and are there different levels of approval required for varying amounts?
  • What methods do you employ to monitor time and effort?
  • Can you outline your procurement policies?
  • What strategies do you implement to reduce the delay between the request for grant funds and vendor payment?

As a grantmaker, it’s important to review all your grant terms and conditions thoroughly. This process ensures that you fully understand the commitments you’re making and the expectations you’re setting for your grantees. Additionally, it’s essential to confirm that any extra policies or requirements you mandate are clearly documented and easily accessible. Providing this clarity and accessibility helps your grantees to comply with your terms more effectively, fostering a transparent and successful partnership.

Supervision and Oversight

Crafting excellent policies is crucial for the success of any project, but the real challenge often lies in their effective implementation. It’s important to encourage your grantees to adopt these policies and closely monitor specific activities to ensure adherence to the established guidelines. This involves a detailed evaluation of processes and outcomes to identify areas of improvement. Furthermore, it’s essential to support grantees who may need more systems or resources for effective monitoring. Providing them with tools, training, or even direct assistance can significantly impact their ability to implement policies successfully and achieve their objectives.

  • Verify that relevant staff members are aware of and comply with established policies and procedures.
  • Guarantee that expenses charged to grants are justifiable, appropriately allocated, and permissible.
  • Ensure the grantee applies organizational policies consistently across all grants.
  • Confirm that expenditures are properly documented with adequate evidence.


This weakness is commonly observed across grantees of all sizes, indicating a universal challenge in the sector. As a grantmaker, it is imperative to identify these weaknesses and actively ensure that your grantees adhere to specific standards and practices to mitigate these issues.

  • Regularly and promptly reconcile their general ledger accounts
  • Ensure the property records for equipment acquired with grant funds match the accounting records
  • Conduct a reconciliation of the physical inventory of purchased property with the corresponding property records

Many of your longstanding grantees will already possess the necessary documented internal controls and reporting mechanisms, making these requirements merely a formality. However, uniform guidance on utilizing a fund accounting software to automate these processes or pairing them with a mentor organization to assist in their establishment may be needed for emerging organizations.

Develop a Policy for Managing Whistleblower Complaints

Even when a strong relationship with a grantee and documented controls are firmly in place, unexpected issues can still emerge. Whistleblowers play a crucial role in mitigating risks by highlighting potential misconduct. They can significantly save time and resources and prevent reputational harm by pinpointing problems early. Encountering a whistleblower complaint necessitates a strategy focused on maintaining transparency and accountability. Here are some detailed tips for managing these situations effectively:

  • Establish a clear and accessible whistleblower policy to encourage reporting of any misconduct without fear of retaliation.
  • Ensure that every complaint is taken seriously and investigated thoroughly to demonstrate your organization’s commitment to integrity.
  • Communicate openly with the whistleblower, acknowledging their concerns and outlining the steps you’re taking to address the issue.
  • If necessary, engage an independent third party to conduct the investigation to ensure objectivity and fairness.
  • Implement corrective actions promptly based on the investigation’s findings to rectify the issue and prevent future occurrences.
  • Review and strengthen your internal controls regularly to minimize the risk of similar issues arising in the future.

Adhering to these guidelines enables you to handle whistleblower complaints efficiently, thereby strengthening your organization’s culture of openness and accountability.

Your whistleblower policy should be thoroughly comprehensive, covering financial irregularities and a wide array of activities and operational procedures within your company. It’s crucial to ensure full compliance with state and federal laws, which are designed to protect whistleblowers from retaliation. Given the complexities involved, seeking external legal advice from experts specializing in whistleblower protection laws is highly advisable when formulating your policy. Additionally, it’s paramount to implement a well-structured internal procedure to manage complaints effectively. This procedure should be documented and easily accessible to all employees, preferably through an internal intranet site dedicated to policy and procedural documents. It should be included in your employee handbook. This approach will help foster a culture of transparency and trust, encouraging employees to come forward with their concerns without fear of retaliation.

Promptly address complaints by taking quick action and implementing suitable corrective measures when required. Suppose your organization needs more capacity or the necessary skills to effectively manage this process internally. In that case, consider outsourcing this function to experts who specialize in handling such matters. Additionally, actively engage the Board of Directors in overseeing and supervising the whistleblower process to ensure transparency and accountability. It’s also crucial to conduct regular reviews and updates of your whistleblower policy to guarantee its continued efficiency and relevance in addressing issues. Furthermore, make it a practice to annually assess this policy alongside your other organizational policies to ensure a comprehensive and effective approach to governance and ethical conduct. This holistic review should help identify gaps and make necessary adjustments to strengthen your organization’s ethical framework.

Successful Grantor-Grantee Relationships

Most organizations seeking funding are highly efficient and well-managed nonprofits committed to making a significant impact. Cultivating strong relationships and assessing their internal controls may give the impression that operations will run smoothly. Yet, it’s vital to develop and rely on robust internal controls, adhere to best practices, and maintain well-documented policies. Such a strategy protects your grantmaking process against possible mistakes or fraudulent activities. Beyond this, creating a culture of trust and mutual respect between the grantor and the grantee is essential for the success of any nonprofit project. It’s crucial to establish open communication channels where both parties can honestly discuss challenges and opportunities.

Additionally, building strong relationships with your grantees facilitates greater transparency and accountability in their use of funds. This transparency fosters long-term partnerships and a shared vision for achieving the desired impact. When both parties are aligned, there’s a stronger likelihood of meeting the goals and objectives outlined in the grant agreement. Regular communication, site visits, and progress updates help to foster this alignment and build trust between the grantor and the grantee.

Learn how your grantmaking organization can mitigate risks throughout every phase of your grant cycle. Engage with a CommunityForce expert today for tailored advice and solutions.

Whether you’re a startup organization or a leading corporation, CommunityForce provides fully customizable, all-in-one online grant management solutions to maximize your efficiency, simplify complex processes, and improve collaboration so you can focus on increasing your impact. We’ve helped organizations streamline their entire process no matter the size and scope of their giving.