By David Murillo, CAE, President + Chief Mission Officer, The Core Management Company
If the pandemic has proved anything, it’s that the unimaginable can happen at any moment and when you least expect it. It is with that maxim in mind, that associations and other non-to-for-profit organizations have employed the practice that squirrels likely have for ages—storing nuts during the summer for the inevitable winter. In the case of our industry, we call it reserve policies. These are board-established policies that determine how much money on an organization’s balance sheet is specifically sequestered for the purposes of helping to fund operations in the event operational income slows to a trickle or even comes a halt—as it did for many in the last year.
For many organizations, COVID triggered a time for austerity given the disruption to their operations. But for those groups with little or no reserves, it became an existential threat.
I’ve often believed that the term, “non-profit” does a disservice to our industry. The best-selling author and sought-after keynote speaker Simon Sinek has suggested that “for-impact” is a better term to describe the non-profit industry in that it better describes what we do. But on a more fundamental level, “non-profit” arguably implies to organizational boards of directors that while there may be specific programmatic financial performance goals, overall end-of-year “profits”, or net revenues after expenses for the purposes of reserve building, are not necessarily a priority for the organization that they serve. Carrying that idea further, a notion can be born that having a healthy “rainy day” fund is a luxury or an extravagance, or something to be considered when there is discretionary income; something perhaps that another future board can afford to entertain. This notion is not accurate, and I would argue dangerous.
Among the fiduciary responsibilities of board members is to preserve a given organization’s resources, of which both human and capital are fundamental. But even these are mere tools by which to fulfill the ultimate role of a board which is to oversee and execute a mission. This is why such emphasis is placed on the strategic role of a board—they along with management’s executive leadership must always be looking beyond the horizon for both opportunities to fulfill the mission more effectively as well as threats that could curtail it—including existential ones that could leave the organization compromised monetarily if not existentially. A solid reserve policy must be part of this strategy. It cannot be seen as an option, but rather as a necessary and crucial element in an organization’s operations.
There is no one right answer with respect to what level of reserves an organization should have in its coffers, in fact, there cannot be a “one-size-fits-all” solution, as every group is unique in its mission, operational monetary cycle, and strategic plan. For example, for groups whose members and/or constituents are highly subject to economic elasticity, such as construction or retail, the approach may be different than one whose industry is more stable. Also, if an organization is vastly dependent on one source of income such as membership dues or event income, this too will inform the dialogue of what an appropriate reserve policy should be. One conventional standard out there is that organizations should maintain at least 50% of their annual operating budget as a minimum of reserves.
Another area to consider is what vehicles to employ to store reserves which can range between liquid ones such as FDIC-insured savings accounts to more speculative ventures such as investments. Many boards with a healthy reserve will diversify their monetary allocation with some investment activity.
Whatever the eventual decision a Board reaches with respect to how much a reserve to carry and how to allocate it, it is of critical importance that those conversations take place early and often. The time at which the crisis occurs is not the time to initiate them. In like manner, our proverbial friend the squirrel is unlikely to survive the winter if he waited until the first day of snow to begin gathering the nuts.