Reserves: How Much Is Enough?
It’s common practice in associations to say that an association should plan on having reserves large enough to cover six months’ worth of operating expenses. But is that enough for a small association?
Kim Robinson, president of Frontline Association Management, has seen many small associations work to boost their reserves well beyond that.
“Six months of money in reserves isn’t a lot of time to turn something around,” she says. “Most of my clients have policies that are closer to a year.”
Larger reserves may be more urgent at small associations, Robinson says, because their revenue options are likely to be less diverse. The liquidity of those reserves is a key issue that committees and treasurers should address with their financial managers or association management companies. Tami Bringman, director of financial administration at VTM Group, sees a distinction between investment strategies at the corporate and small-association levels. “Associations want to maintain a different style of liquidity,” she says. “Corporations have lines of credit, while associations are more cash-focused.”
However you invest, Douglas M. Kleine, CAE, president of Professional Association Services, stresses the importance of setting policies that rein in individual committee members. “Investments is where I’ve seen finance committees get way too involved,” he says. “It’s like insurance: You can pick the broker, give the broker guidelines, and let the broker do the shopping for you, or you can do the shopping directly, but you can’t do both.”