Guest Blogger: Denise Clark, Vice President of Finance/Operations, AMGAll non profit organizations should have reserves. But there is not common agreement as to how large a reserve fund should be. Often, there is not a good understanding among board members and officers as to the value or purpose of reserves. Reserves are unrestricted net assets, excluding property. Reserves can be divided into various funds given the needs of the association, such as a general reserve fund, a building reserve fund, and other funds the association needs to earmark for later use.
In my twenty-five years in non profit finance and accounting, the "rule of thumb" I've most often heard tossed about was "keep 50 percent of your annual budget in reserves." Most associations are lucky to reach that goal, given that the pressure to spend money is always greater than the desire to save it. But there's nothing magical about a half year’s worth of cash.
Reserves serve three vital purposes:
1. They enable the association to survive a storm, such as a political schism that splits the association, a disastrous conference, a nasty lawsuit, or a bad policy decision on programming, all of which can happen regardless of your efforts to head it off.
2. They enable the association to take advantage of unique opportunities that arise: launching a new program with high start-up costs and a long-term pay off, filing a lawsuit to defend the industry or profession, or a special lobbying effort requiring outside advocacy.
3. They provide ongoing non-dues, investment income that reduces dependence on dues income and conference income.
If your reserves are under the “half year of your annual budget” level, spending any reserves should be approached with extreme skepticism.
There are two ways to build your reserve funds. Commit each year to an expense line in your G&A budget entitled “Commitment to reserves” or budget each year for excess revenue over expense which then goes to your reserve fund.
No volunteer leader or staff member should have authority to make investment decisions. The executive committee, treasurer, finance committee, and/or board should approve the investment strategy suggested by the organization’s independent investment advisor. The advisor should present the board with a summary of the year’s activities and future projections at least once a year.
Consider these guidelines when ensuring that you have thought through the key elements that are important to include in any well crafted association reserve policy.
As Vice President of Finance, Denise Clark has more then 20 years of finance and accounting experience encompassing both for profit and not for profit organizations. She is responsible for managing the finance and accounting operations of AMG and the accurate and timely delivery of financial information each month to over 18 different corporate entities. Denise works with numerous client association executives and volunteer leaders to develop and implement budgets, investment policies and board financial policies.
