Association Reserves: Key Policy Components

By Denise Turner, Vice President Finance/Operations

Reserves

Every association leader should periodically consider their organization’s reserves.

Denise Turner

Association financial policies are very similar to your own personal financial policies. Tracking expenditures and income; carefully monitoring the flow in both directions and, hopefully, putting aside funds for a rainy day is important. But, unlike your personal finances (unless you are fortunate enough to employ a team of accountants), AMG’s client-associations benefit from our experienced finance department to stay on top of their revenue and expenditure items. Our finance team, along with each organization’s client leader and board, manage the budget and collaborate on generating ideas to prudently expend association resources on behalf of their members and other stakeholders.

Just like your own, part of an effective non-profit financial strategy includes savings. Association leaders are stewards of the organization’s coffers and are responsible for ensuring that resources are used well. Part of that responsibility must consist of a clearly written reserve policy which will help keep the financial position of the organization healthy. An approved, and regularly reviewed reserves policy not only allows the association’s leaders, board and staff to have clear understandings and directives, but it can also help prevent potential conflicts that may arise over revenue allocation.

There is no specific policy that applies to all nonprofits, but there are some definite components that any boards writing a reserve policy would want to make sure are included.

Here are a few of those components:

  1. Define your reserves. Nonprofits define reserves differently. For example, one association may define reserves as “a discrete subset of its liquid net assets.” Another might define its reserves as unrestricted cash investments; in other words, those funds that aren’t earmarked for any other purpose.
  2. Determine the purpose of your reserves. The purpose of a reserve policy is to elaborate on the definition and give specific goals. A typical policy may include the following:
    1. To provide sufficient assets to help carry out the mission of the association
    2. To provide funds for unforeseen contingencies due to unpredictable economic turns in the association’s financial status
    3. To cushion the association during dips in the cyclical variation of its circumstances
    4. To fund strategic initiatives
  3. -Calculate your reserve fund target. Most nonprofit financial advisors will suggest  that this not a one-size-fits all approach. Industry research says only 23 percent of nonprofits have more than six months of needed cash in reserve. The majority had less than three months in reserve, and 12 percent had less than 30 days, it is important to base your reserve fund target off some association-specific metrics, including a long-term financial forecast and an analysis of potential risks.
  4. -Create criteria for achievement and allocation. Once you’ve calculated your target amount of reserves, you’ll want to determine how it can best be achieved. One way is a commitment to annual reserves, another would be to budget specific net revenue over expense each year. Then determine how the reserve fund can be allocated toward specific projects and or strategic investments on behalf of members.

By creating a policy with these components and getting it approved by the board, everyone benefits and should future conflict arise, the policy can be referred to by current officers.