As a board of directors member, it is reassuring to know that the association you serve has money in its financial reserves. But how much money is too much and how much is not enough? Furthermore, how and when should a board use its reserves? Every board wants simple answers to these questions, but the truth is that it all depends on each association’s unique circumstances.
Every organization must be prepared for unexpected changes in expenses and revenue. Sometimes, an event does not meet its full registration expectation or an association incurs unanticipated legal expenses. As noted in the article, “Five Considerations for Establishing a Reserve Policy,” which was published last September in Board Forward, a common guideline for a nonprofit organization is to place 50 percent of current annual operating expenses in a reserve account. Doing so creates a financial safety net. Even if negative events occur, it allows the organization to sustain its annual programs or keep staff at full capacity. The reserves also give the association time to adjust or make changes to move the organization back – or closer to – its original financial goals.
Whether reserves are in place or not, if an association experiences a financial challenge that severely impacts annual revenue, how should it respond? It should first consider expense reduction in current programs and possibly eliminate low-priority programs. The extent of the reduction or elimination will depend on the size of the potential shortfall and the strategic importance of the programs. In addition, if there are programs that consistently lose money, are viewed as less valuable by members or only impact a small portion of members, now is the time to eliminate or fix them.
If expense management is not enough, then a board could consider tapping into any available reserves in order to maintain normal operations. However, it is important that the board understand why the negative financial impact occurred before it takes action so that the losses do not re-occur in the future. If the loss is a one-time event, an organization should continue business “as is” and not disrupt other successful programs. The board can take money out of reserves to fund the normal operations, such as staffing and programming support. If an organization is losing money every year and is dipping into reserves to fund normal operations, the board must carefully review its mission and management of the organization. Several questions to ask include: Does the mission still meet members’ needs? Are operations being efficiently managed? Is the organization evolving or doing what it has always done in the past? Implementing change can reinvigorate an organization and create new revenue opportunities, lessening the burden or even dependency on reserves.
In addition to managing unplanned changes in revenue and expenses, it’s important for an association to be able to readily access funds to meet its cash needs. As a precautionary measure, a board should consider moving a portion of its reserves fund into cash or an investment that can be easily converted into cash.
Most associations would like to have too much money in reserves, but how much is too much? As stated above, 50 percent of current annual operating expenses is a very common threshold, but some associations hold a full year or more of operating expenses in reserves to prepare for a future project or a large expense.
If an organization is above this threshold, the next question to ask is how should the organization invest its reserves? An organization should have investment policies in place and use them to guide portfolio-allocation decisions. In general, a healthier association (measured in terms of reserves as a percentage of annual operating expenses) can afford to take more risk on a relative basis. On the other hand, an association that has very low reserves should be more conservative in its investment allocation to ensure that it does not have to sell investments at inopportune times. The overall comfort level of an association’s leadership with market volatility and risk also impacts the investment portfolio allocation.
After reviewing potential financial investments, a board can also look to invest in new services and products that will increase membership, increase the value of membership or create future financial growth. For example, the National Association of Orthopaedic Nurses (NAON) has consistently been mindful of building strategic financial assets and always keeps more than 50 percent of operating expenses in reserves. In 2011, the association decided to update one of its premier member publications. Because the publication project was not a program in its annual operational budget, NAON chose to use money from its reserves to finance the work. A three-year project plan and budget were developed. Each year for the next three years, expenses related to the project were drawn from reserves. Once the project was completed and the updated publication was offered for sale, the association began to recognize increased annual profits. A portion of the profit was added back into the reserves to be used for the creation of new products. By strategically using reserves, NAON was able to increase its annual operating budget, replenish its reserves and provide members valuable resources.
What if an organization does not have 50 percent of operating expenses in reserves? Is it ever okay to draw from such an account? One of the primary uses of a reserves fund is for strategic initiatives. Often, an association thinks of spending these funds on strategic initiatives only when times are good. But for associations that are in strong positions for growth opportunities, the present may be exactly the right time to launch an initiative or accelerate a current initiative that shows promise.
In 2013, the Association for Nursing Professional Development (ANPD) didn’t have 50 percent of operating expenses in reserve, but it did have a strong and committed membership base and a highly successful annual conference. ANPD knew from membership surveys what products and services members wanted, and if ANPD had someone who could produce content based on that information, it could create new products and services. To take advantage of that fact, the association needed to a hire a high-level industry expert to oversee ANPD’s annual meeting education content and planning committee, as well as coordinate with the association’s products and services committee to develop new textbooks, webinars, etc. The annual budget, though, did not allocate any funds for this additional hire. The ANPD Board of Directors looked at the potential value that could be created and decided to use money from reserves to hire the new staff person. With her in place, ANPD accelerated the development of multiple new products that are scheduled for delivery later this year. These new products will bring in additional revenue, increase the association’s presence in the industry and enhance the overall mission of the organization.
There are no easy answers and no “one-size-fits-all” approach to using association reserves. Ultimately, the goal is to have appropriate resources available to successfully manage unexpected events that negatively impact an association’s immediate financial health or to use reserves to create products and services that will reinforce the association’s mission and overall value. Subsequently, boards should have policies and strategies in place before such events happen as the windows to respond can be quite short.
As senior director, Healthcare + Scientific Industry Practice at SmithBucklin, Kaye Englebrecht, CAE, serves as the executive director of the Association for Nursing Professional Development and the National Association of Orthopaedic Nurses. She has more than 30 years of association management experience. Prior to joining SmithBucklin, she spent 23 years serving in management, regulatory and chief staff officer roles for nonprofit associations.
This article was originally published in the June 2014 edition of Board Forward. To view the original piece, click here.