When funding stops: a strategic roadmap for not-for-profits to assess going concern risk

Weeks before its annual fundraising drive, a not-for-profit leadership team learns that a key long-time corporate donor won’t be renewing its major gift. Suddenly, vital programming is at risk, staff worry about upcoming payroll, and board members scramble to reassure community partners. This sort of volatility and dependency is somewhat common in the not-for-profit world, but extreme fallout doesn’t have to be. Solutions lie in careful planning after a well-executed going concern evaluation.

A going concern evaluation is the analysis of an organization’s ability to meet its financial obligations as they come due for at least the next 12 months. For not-for-profits, this includes a comprehensive analysis of fluctuating liquidity, funding source diversification and reliability, donor behavior shifts, and the broader economic environment. 

It’s also a required accounting standard. Management must evaluate whether conditions or events raise substantial doubt about the organization’s ability to continue as a going concern — and to disclose the conclusion and supporting plans when applicable. Organizations should maintain detailed, up-to-date documentation of risk factors, key assumptions, scenario analyses, and proposed responses.

A clear going concern conclusion is central to transparent financial reporting, enabling not-for-profit leaders and stakeholders to understand whether the organization can continue operations for the required look-forward period. For not-for-profits, this comes with special challenges. They rely on factors such as donor trust, funding commitments, donor restricted funds, and mission programs that don’t always generate steady, reliable income.This article details the common warning signs of a going concern problem at a not-for-profit, then explains how to evaluate and respond to it.

Common financial warning signs

Not-for-profit leaders and board members should assess financial health using clear, consistent indicators. Recognizing early warning signs allows them to act before it’s too late. The following are common financial red flags to monitor:

• Recurring operating losses or sustained net asset deficits: If expenses consistently exceed revenue without a credible recovery plan, the organization may not be sustainable.
  • Metrics to monitor:
    • Operating deficits for three consecutive years
    • Annual losses exceed 10% of total annual expenses 
• Low liquidity or insufficient cash: Not-for-profits often have small reserves. Shortages lead to trouble paying staff, dependence on short-term borrowing, and delayed vendor payments.
  • Metrics to monitor:
    • Cash on hand: Maintain three months of cash on hand, the amount of money needed to operate if revenue stops (adjust based on funding stability and risk tolerance).
• Loss of a key funding source: Funding source concentration creates risk. Operations can destabilize if a key funder withdraws support or imposes conditions that restrict access to critical operating funds.
  • Potential consequences:
    • Postponed or canceled projects
    • Reduced services
    • Sudden revenue shortfall
• Debt agreement breaches or near breaches: Lenders often require certain financial covenants (e.g. minimum liquidity ratios). Violating or almost violating these rules indicates financial strain.
  • Example: Falling below a required ratio due to declining contributions or rising expenses
  • Potential consequences:
    • Creditor warning or intervention
    • Increased scrutiny from auditors
    • Loan default
• Major program cuts or staff layoffs: Significant program cuts or staff reductions telegraph financial stress. While sometimes needed, they can have non-financial consequences such as:
  • Undermining community trust 
  • Reduced mission impact
  • Less organizational capacity

Documenting and analyzing financial health

A properly documented going concern assessment is a critical part of sound financial governance. Under accounting standards such as ASC 205-40, management is responsible for evaluating and disclosing substantial doubt about the organization’s ability to continue operating over the next 12 months. 

The process’s foundation

The process begins with management’s careful and objective assessment of financial health and operational viability. Thorough records serve multiple goals:

• Transparency for boards, auditors, lenders, and donors 
• Decision support for stakeholders considering continued support, engagement, or oversight
• Compliance with applicable accounting standards

Clear, well-supported documentation reinforces confidence in leadership’s stewardship while maintaining regulatory expectations.

Key components of the analysis

A strong analysis should clearly explain both risks and how leadership manages them. This helps avoid audit problems, builds trust and makes sure key assumptions, plans and forecasts can be tracked and verified. Documentation should include:

• Key risk factors: Identify and explain material concerns such as cash shortages, lower donations or deficits.
• Management’s mitigation plans: Provide a clear, data-driven forecast demonstrating how leadership intends to address issues.
• Defined time horizon: Ensure the evaluation covers at least 12 months from issuance date of the financial statements, as required by accounting standards and favored by auditors. This may be extended to an 18-month window.
• Cash flow projections: Prepare detailed projections outlining expected inflows and outflows, supported by reasonable assumptions (e.g. donor contributions, grants, program fees, etc.).
• Cost management: Outline any planned expense reductions, including timing, expected savings, and alignment with board-approved budgets.
• Third-party support: Attach commitments from funders, lenders or donors to verify that the organization can meet its obligations and maintain sufficient cash on hand.

Reaching a conclusion

Management should formally conclude on going concern status using clear, standardized categories from the framework, supported by evidence:

• Clear path: No substantial doubt exists about the organization’s ability to continue operations.
  • Example: Stable donor commitments and healthy cash reserves are shown with credible financial projections.
  • Disclosure expectation: Document that no conditions or events raise concern about ongoing operations over the next 12 months.
• Caution: Risks exist but are mitigated by realistic, documented strategies.
  • Example: the loss of a key grant may be offset by new funding sources or approved cost reductions. Board minutes and updated cash flow forecasts corroborate this.
  • Disclosure expectation: Acknowledge remaining risks and outline practical, evidence-based mitigation plans. Clearly disclose key uncertainties or assumptions, and support conclusions with verifiable actions or documented agreements.
• Critical: Substantial doubt remains despite all remedial actions.
  • Example: Significant cash shortfalls persist with no documented viable funding plans.
  • Disclosure expectation: If substantial doubt is not mitigated, management must conclude it exists and clearly disclose the situation, limits of mitigation, and resulting uncertainty. All conclusions must be evidence-based and well documented.

Each category should be explicitly connected to supporting documentation and risk assessments, enabling stakeholders to clearly see how the conclusion was reached.

Ongoing monitoring and audit readiness

To avoid last-minute surprises and ensure a smooth audit, organizations should maintain a robust liquidity control monitoring (cash reserves, debt obligations, and cash inflow and outflow timing). They should also prepare rolling 12- to 18-month forecasts that are updated regularly to reflect current conditions and decisions. 

The role of board governance

Effective board governance in this process requires receiving regular, comprehensive financial updates and reviewing scenario plans (best- and worst-case) based on current funding commitments and projected revenue streams. By assessing impacts from risks, such as a major donor loss or unexpected expense increases, boards can proactively consider alternatives, including funding strategies, budget adjustments, and scenario-specific mitigation strategies. Early coordination with auditors is also vital. Discussing risks, unusual transactions, and emerging issues in advance helps prevent surprises and supports a smoother audit.

Final thought

A going concern evaluation is more than just a compliance task. When executed effectively, it’s a management tool that helps leaders make smarter, more transparent decisions, building trust with auditors, donors and staff. Reach out to learn how we can help.

About our authors

Julie Adams, CPA, has more than 20 years of not‑for‑profit attest and consulting experience. She’s known for her pragmatic approach, compassionate leadership, and deep understanding of the unique financial, operational, and governance dynamics within not-for-profit organizations. Julie.adams@sikich.com

Lisa Denholm, CPA, has more than 15 years of experience in accounting services. Lisa is a director in assurance services with a professional specialty auditing not-for-profits. She assists clients in navigating financial challenges with technical guidance and expertise. She builds and maintains trusting relationships with strong communication skills and a genuine interest in her clients’ success. Lisa.denholm@sikich.com