Saving for that rainy day: budgeting your association's reserves

Guest Blogger: Denise Clark, Vice President of Finance/Operations, AMG


All 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.

Governance vs. Management: Policy Governance® model can help Directors “get out of the weeds.”

For more than two decades now, I have been observing the election, development, conduct, and decision-making processes of nonprofit governing boards. My interest in how boards govern (or don’t) has increased to the point where the characteristics of elected leaders has become more interesting to me than ever before. I share these interests with many senior association professionals. Closely connected are my observations of board-staff relationships, primarily because these are the key success indicators relative to AMG’s successful service to clients.

Recently, at a session of the American Society of Association Executives (ASAE) annual meeting, we discussed observations on governance versus management among nonprofit organizations. Our discussion on why boards exist did not demean the passion, energy, and commitment of board members. Those of us in the profession know Board members to be very intelligent, experienced people as individuals. Yet as John Carver, author of Boards That Make a Difference states, “sometimes boards tend to be incompetent groups of very competent individuals.”

In our ASAE session, we spent a good amount of time discussing Carver’s Policy Governance® Model (www.carvergovernance.com) and concluded that one central reason a board exists is to be accountable for the efficiency of its association. The board is where all authority and accountability resides. And yet, so many boards do not understand governance and instead involve themselves at various levels in management and operations.

I like Carver’s model because it doesn’t make room for board members to involve themselves in the operations of the organization. Instead, boards should be strategic thinkers with the long term health of the organization in mind. To do this, boards employ a CEO or Executive Director to report on the operations of the organization. Through this executive figure, Carver asserts that boards need (1) to be definite about its performance expectations, (2) to assign these expectations clearly, and then (3) to check to see that the expectations are being met.

To achieve a harmonious board-staff relationship--and ultimately succeed as an organization--boards should demand organizational achievement in a way that empowers the staff, leaving to their creativity and innovation as much freedom as possible. This is a question of what and how to control, but it is equally a question of how much authority can be safely given away. Carver argues that the best guide for the board is to give away as much as possible, short of jeopardizing its own authority.
Board members should no longer be recruited based on their having skills that mirror the skills of staff. Policy Governance® seriously asserts that boards be visionary and provide long term leadership. Boards must persevere in describing purpose and ethics/prudence boundaries. Forming clear policies from those values is far harder than telling the staff how to do its job. Board members must be experts in governance, not management.

Carver’s Policy Governance® model provides an alternative for boards unhappy with the amount of reactivity, trivia, ritual and management they are involved in and are seeking to be truly accountable. But attaining this level of excellence requires that a board breaks with traditions and preference to manage and embrace governance. The model offers a challenge for visionary groups determined to make a real difference in tomorrow's world. That is why those of us in the business of association management believe Carver’s model has much merit.

CAEs More Attractive in Executive Searches

I recently returned from a recruiting trip for an executive director for one of AMG’s association clients. Interviewing potential candidates with a task force comprised of board leaders, I am reminded of the importance of the Certified Association Executive (CAE) designation. Participating in many, many executive searches for various clients over the years, I have seen that the success of an association depends on the leadership embodied by a true association professional.

For the few that may be unfamiliar, the Certified Association Executive (CAE™) program is designed to elevate professional standards, enhance individual performance, and designate association professionals who demonstrate the knowledge essential to the practice of association management. Earning the CAE credential is the hallmark of a committed association professional.

Indeed the successful candidate from this recent search has worked toward the CAE credential. The American Society of Association Executives (ASAE) maintains recognition among board leaders, members, and those involved in hiring nonprofit professionals including executive recruiters and association HR directors as one benefit of successfully completing the program. I agree that the program makes candidates for executive association positions more competitive. As I assist and lead searches for association leaders, I value resumes that come across my desk with the CAE designation and will continue to do so. True association professionals are ideal candidates for managing associations in my book.

If you are interested in becoming a Certified Association Executive, check out more detailed information from ASAE.

Making Your Organization’s Success Factors Count in 2010

As a volunteer leader of an association, if you were asked what three key success factors will be most important for your organization in 2010, what would your answer be?

In creating a list of activities or deliverables in which an organization needs to excel, leadership teams frequently include a standard group of six or eight. Typically, they'll list, "understanding our member’s needs," "producing desired benefits and services," "managing to the approved operating budget," "developing innovative member marketing programs," or “delivering a great annual conference.”

As you consider and prioritize, I suggest that it is important to limit your list of success factors to two, or at most three. Here's why... While these lists are complete, they can sometimes be so all-inclusive that they're not much more than "mom and apple pie." And the success factors listed by some leaders don't imply a true “focus” for their particular organization.

Yet, a razor sharp focus is exactly what's required for success. Focus on a few activities – on the most important activities – on those two or three key success factors for this year and for this time. In any non profit or business, there are two or three activities which are the primary determinants of success. If your organization is especially good at those activities and just mediocre at everything else, your association can be successful.

Determining Appropriate Key Success Factors
In the for profit world, such as in the computer software market, key success factors go to establishing efficient channels of distribution and providing post-sales support. Too much concern about writing "code" may be a technical nicety, but from a competitive point of view, it's a waste of business resources.

In the non profit world, the measures of success we have traditionally been proudest of include membership growth, new programs, increased revenue, and increased market share—particularly when they were accomplished with leaner budgets and fewer staff. While these measures are still on-target for many associations, some groups are looking at success differently in these difficult economic times. In their book, “7 Measures of Success - What Do Extraordinary Associations Do that Other Don't?,” ASAE and the Center for Association Leadership note that success for extraordinary associations is based on a commitment to purpose and mission, a commitment to continual analysis and feedback and a commitment to action.

Changing Success Factors Caused By a Down Economy
Rather than struggling to maintain traditional offerings and find new sources of revenue to prop them up, some associations are coming to terms with the fact that they simply can’t do it all any more, and they can’t do things the way they always have. These associations are revisiting their essential reasons for being, refocusing, and restructuring their operations and governance to be more relevant to their members and more responsive to the changing environment.

From downsizing or stopping specific programs to restructuring and co-locating events with like-minded groups, associations are exploring a myriad of ways to remain viable and to be successful. Here are examples of success factors that will ensure your organization’s relevance and growth for 2010:

• Making room for programs that produce - Use data to support a call for change. Engage members, provide valuable programming, and connect people to build relationships—this will serve to highlight the need to refocus resources and energies.
• Responding to industry downsizing- Declining revenue, dwindling numbers of core membership in the wake of industry downsizing, cost-cutting…sound familiar? These are the very same hurdles several AMG associations face. In addition, the number of companies willing to pay employees’ membership dues is declining. Association leaders should consider a business plan that details exactly what audiences the association should serve, the market and revenue growth potential, and how the organization would reorganize to take advantage of the opportunities. A board-approved new plan and structure should focus on expanding service to growth markets by shifting resources from the traditional, but shrinking, core membership.
• Developing a strategic, policy-making board which leaves the details to its staff and holds them accountable for outcomes - Many board members and volunteer leaders are seeing their role in this new light, and dropping partnerships and programs that aren’t contributing. The outcome: A strategic, future-focused board that is better able to embrace change. When the board and CEO have clarity of roles, agreement around outcomes, and are focused on the vision of what is going to be different, the politics of organization vanish.

Whatever your top three success factors become for 2010 make sure the are sharply focused on what your organization needs most and on what truly matters most to that group of core members who sustain through dues and involvement in the purpose and mission of your non profit.

A Focus on Value

Running a trade association or professional society is very much like running a for profit business. Typical questions to be asked by a board in this tight economy include, how will we position ourselves and what is our unique value proposition, where will we find and how will we recruit new “customers,” how can we grow our organization and take it to the next level. Especially in a down economy it becomes critical for non-profits to revisit their strategic plan and explore revenue generating opportunities, as opposed to only looking at expense reductions which could impact members and member retention. Surviving any downturn does not mean simply belt tightening and scaling back, non profits should follow the business model and look for new and innovative ways to add value and benefit for those dues members are willing to pay.

At AMG, high on the list of benefits our client partners perceive is the specialization and experience our seasoned executives have in offering strategic advice and best practices for moving forward and adding value. We encourage clients to:

• Continuously communicate their value proposition to membership. Whether we are “selling” memberships, education or event registrations, it is all about conveying the benefits and ROI for each dollar spent.
• Keep innovations coming and to do more with less. Because AMG works with multiple clients, we can easily facilitate idea-sharing among our executives who them make recommendations to our client boards.
• Maximize and continuously monitor revenue and expense. AMG helps prioritize assigned staff time to ensure it is put to revenue generation initiatives and the organization is seeing a real ROI.
• Focus on quality benefits and initiatives which are “consumed” and appreciated by members. AMG can be a give a good third party assessment.

While we believe 2010 will continue to be a tight economy and a full recovery may not occur until late next year, we encourage boards to look beyond the coming 12 months and plan for the future. There is no better time then the present to survey members using an appropriate needs assessment tool; determine what they want from their association in the year ahead, how their needs have changed and what new benefits and services they might wish to have down the line. Planning for the future and focusing on the value proposition allows any non profit to compete with the best for profit business.

Committees – the workforce of your organization

Committees are one of the greatest inventions of the association world. They are a group of volunteers, aside from the board members, who research, deliberate and make recommendations for the association, typically based on goals and objectives found in the current strategic plan. Often, these volunteers have specific knowledge or expertise on the issue at hand. This assumes the board is able to harness this workforce to benefit the association. Not always an easy task.

In my years as an association executive, I have come to realize what makes a great committee. First, having committee members who are not on the board is vital. It helps to make sure the board does not get overwhelmed. It also the helps the board to recognize potential future leaders, increases buy-in and builds ownership of the association’s mission and goals. It shows transparency and inclusiveness between the board and members, a great thing for the operation of any association.

Another important aspect of good committees is specific board charges and role responsibilities. By giving the committee a specific task with a specific desired outcome one can reduce the chances of miscommunication and promote a successful outcome. By requesting regular reports from each committee the board is kept informed and the committee is kept motivated. This also helps the committee feel like an extension of the board. It is important that committee members understand that their role is to study an issue and report back to the board with their recommendation, therefore saving the board time. A committee has no separate powers or authority to make decisions for the association.

The most important thing that makes great committees is a great board. The board must understand and trust the work of the committee members, be willing to ask questions of the committee members, and appreciate the work of the committee. Nothing can ruin a volunteer’s motivation faster than rejection of their hard work or ideas. The board must be diplomatic, understanding, and appreciative in order to keep a committee motivated and productive. Giving clear instructions should reduce miscommunication between committees and boards but if problems arise the board must be appreciative of the committee’s work above all other emotions.

Sometimes a committee is simply unnecessary. Review your committees at least once a year to make sure they are addressing relevant issues or topics. Some committees may need to be eliminated completely while others might just need to be reevaluated. Some boards use the “clean slate” approach where they sunset all committees other then those required by the bylaws every few years and reinstate only those committees that have a valid assignment.

Incorporating new volunteers into the leadership of your association is a great way to increase participation, find new leaders, and gain the knowledge of experts who wish to be of service. Putting motivated volunteers on committees is a perfect place for them to learn about the workings of the association while saving the board time and energy. By setting committees up for success and supporting them, a board can really ensure they do great work for the association!

Visiting Old Friends: Updating Bylaws

It appears to be bylaw season around the office at AMG. Many of our clients have been taking the opportunity this summer to review and check to see if current practice and preferred procedures conform to what’s in their bylaws. And often they do not. If you find this to be the case, it may be time to revise this important governance document to better correlate with operational procedures and to better achieve desired outcomes.

When it comes to the basic governance of your association, the bylaws are the proverbial backbone. Or one could look at bylaws as the foundation for all policies and procedures of an organization. They are rules adopted by members that dictate how the members wish to be governed and have their organization operate. They also regulate all actions taken and decisions made. If the bylaws do not appropriately reflect the needs and current practices of the organization, trouble can occur.

Updating the bylaws to match the present practice and member preferences seems to be an easy choice. Maybe your organization needs a revamp of its election process, or perhaps, in the shifting of your organization’s management, a new board position is deemed necessary. Maybe a governance rule or regulation has been established that your membership needs to address. Whatever the situation is, we, as association leaders, should not be afraid to dig into the “mysteries” of our association’s bylaws and take a long, hard look at them.

There is always the threat of resistance to changes in association bylaws when revisions are being contemplated, with the flag of tradition or continuity being waved. I would never advocate for ignoring the history or traditions of an association or rewriting the bylaws from square one. I am advocating for making responsible changes and streamlining and simplifying with the payoff being a more efficient and successful association. It’s hard to imagine an organization whose needs have not changed at least a few times since they were founded and the bylaws written.

The benefits of revision to out of compliance bylaws definitely outweigh the potential backlash and heavy emotion which is sometime involved in the process. Bylaw revisions can make for a stronger and more effective non profit. In today’s best practice, removing bylaw hurdles to streamline operations and management can save much time and effort and really meet your member needs.

Now may be the time to explore the foundational governance document of your association. How can your governance be more effective, better achieve the mission and goals, and meet the current needs of your members? With strong and concise bylaws as the base of your organization, the operational policies and procedures will be able to flourish and you will be able to build your association into a successful industry and professional necessity.