Although not a widespread issue, some associations are in the enviable position of having a healthy income above their expenses and a large reserve balance. Could they be wasting an opportunity to better serve their members? As association staff, it is your job to ensure your board is fulfilling their responsibility to use those funds wisely.
How much is enough, and how much is too much? The answer is different for each association. There is no IRS rule to follow here, but a consensus is to save one to two years’ worth of operating expenses. This target can fluctuate depending on the risk tolerance of the association and the predictability of income and expenses. An association that relies mainly on one income source, such as an annual meeting, may want to ensure a higher level of reserves than that two-year guideline.
As we have all learned from the pandemic, external factors can severely impact the best-laid plans. Every board should have a conversation about financial risk tolerance and reserves and determine a target that fits their situation.
Boards have a fiduciary responsibility to use association assets in a responsible manner. If a reserve balance grows much higher than an association’s annual expense total, there may be a perception that the board is not proactively managing their abundant resources. Why should the board let reserves sit idle when they could be putting those funds to work toward accomplishing the association’s goals?
Board members have a duty to serve their mission and support their members while still acting as responsible custodians of the organization’s resources. “There must be a balance between fulfilling an association’s mission and protecting their assets,” explained Paula Goedert, partner of Barnes & Thornburg LLP. “Board members must make a conscious effort to strike the right balance for their association.”
As an association staff member, you can begin by evaluating the state of your finances. If you think there is an opportunity to invest back into the association, it’s time to broach the subject with the board. Staff leaders can sometimes find themselves working with a board that is unwilling to make changes even when they determine there are excess reserves. Board members tend to be conservative and reluctant to spend association money.
At times, board members don’t know where to begin addressing the issue. In this case, association staff need to initiate an ongoing conversation about responsibly investing surplus funds in strategic projects that will ultimately benefit their members. According to Rob Batarla, MBA, CPA, CAE in the ASAE Handbook of Professional Practices in Association Management, “Associations cannot rest on their financial laurels and sometimes need to take some risks. To stay current, investments into new revenue streams need to occur.”
The second step is to work with the board to determine the right level of reserves. Once you establish a target, staff will have a general idea of how much of the surplus funds are available to use. The board should see these funds as opportunities to invest in the organization rather than just spending association money. This important distinction can help boards overcome any hesitation they have to using reserves.
Next, staff should review the mission and current strategic plan. If the association does not have a strategic plan in place, then this is the time to develop one. Many outside consultants have experience developing strategic plans for associations and can help uncover new initiatives to pursue.
“Without a plan, organizations tend to meander, and volunteers can get frustrated,” states Michael Barrett, CMF, CPF, of Resonance, a firm specializing in strategic facilitation. “Oftentimes, an outside perspective can assist staff and boards through the process so they can focus on a common direction and develop well-defined goals,” he added. The resulting plan will illuminate areas ripe for investment.
One area you may want to expand is your current educational offerings. Starting out small with an innovative webinar series may make sense. Or developing a new conference for a sub-segment of your membership may be the way to go. If you are not currently engaged in legislative advocacy, this is another area that can greatly benefit membership but can be expensive depending on the level of involvement. It is vital to understand your members’ needs as you explore opportunities.
Once staff, an outside adviser, or both working together have identified the most promising opportunities, you and your staff should create a high-level summary for each one. The summary should estimate the needed time and resource investment and the expected return. Most businesses develop a plan to provide a monetary return on investment. In this situation, however, you should put the return in terms of member or community benefit. Then present these summaries to the board for preliminary approval. From there, your staff and committees can create a full business plan or plans for use of the funds. This multi-step approach ensures you stay on the right track without spending too much time and resources researching plans that the board doesn’t approve.
Finding your association has excess reserves is certainly a good problem to have but investing them wisely requires a clear mission and plan. Begin with an assessment of your financial reserves and how much your association would feel comfortable investing in a new opportunity. Once you know how much you can work with, refer to your association’s strategic plan to identify a project that would drive your association’s mission forward. Create a high-level summary for a project to present to your board for approval. Once they approve, create a full project plan, and begin implementing it.
Association staff have a responsibility to guide their volunteer leaders and ensure the highest level of service to their membership. By re-investing in their organizations, associations can provide even greater benefit to our communities.