February 11, 2025
For trade and professional associations, operating reserves serve as a financial safety net, providing stability and resilience in uncertain times. However, determining the right reserve level and making strategic use of those funds requires careful planning. In a recent webinar, experts from GRF CPAs & Advisors discussed how associations can optimize their reserves using Enterprise Risk Management (ERM), benchmarking, and strategic planning. Here are the key takeaways.
Why Operating Reserves Matter
Operating reserves are essential for trade and professional associations, providing financial flexibility during economic downturns, unexpected disruptions, or investment opportunities. An organization’s reserves are typically composed of net assets without donor restrictions, allowing them to allocate funds based on strategic needs.
A common challenge trade and professional associations face is justifying their reserve levels. Board members and stakeholders may question why significant funds are being held rather than used for programmatic growth or member services. This is where a structured approach to reserve planning becomes critical so that boards and other stakeholders understand the planned or potential use of the reserves.
Using ERM to Set a Defensible Reserve Target
Many associations determine their reserve levels through simple benchmarking—comparing themselves to similar organizations. However, benchmarking alone is not enough. A more effective approach involves ERM, which integrates risk assessment into financial planning.
ERM helps trade and professional associations:
- Identify and rank risks specific to their organizations.
- Determine which risks require financial reserves.
- Balance risk mitigation strategies with growth opportunities.
One tool used in ERM is the heat map, which categorizes risks based on their likelihood and financial impact. By focusing on high-impact, high-probability risks, trade and professional associations can ensure their reserves are both strategic and defensible.
Examples of Heat Maps:
The Role of a Written Reserve Policy
A well-documented reserve policy is key to effective financial management. This policy should outline:
1. Reserve Targets: The actual reserve target will be grounded in the ERM process and the amount will be determined or estimated based on the high impact and high probability risks. Using data from Form 990s, we have observed that most trade and professional associations have 3–6 months of operating expenses in their reserves and some organizations have up to 12–18 months in their reserves.
2. Investment Strategy: How reserve funds will be invested—whether in liquid assets for immediate needs or longer-term investments for growth will depend on what the reserves will be used for and the time horizon of that use.
3. Review and Adjustments: Regular reassessment of the reserve policy ensures that the reserve policy aligns with the organization’s evolving needs. Some organizations review their policy annually while others review their policy on another cadence.
Strategic Use of Reserves: A Case Study
Michael Johnson, former CEO of the National Stone, Sand & Gravel Association (NSSGA), shared how his association reevaluated its reserves. Initially, NSSGA maintained one year of operating reserves. However, during the COVID-19 pandemic, they realized this level was more than necessary. While we understand that many nonprofits desire to maintain one year of reserves, we wanted to highlight the strategic thought process that NSSGA took to reduce their reserve target and then ultimately build it back up through subsequent years.
By reassessing their financial strategy, NSSGA reduced their reserve target to six months and reinvested excess funds into:
- Improving their governance and member engagement.
- Upgrading their database and technology infrastructure.
- Adjusting their dues formula to accommodate industry consolidation.
This strategic reinvestment strengthened NSSGA’s long-term sustainability while maintaining an adequate financial cushion.
Revenue Diversification and Cost Containment
Beyond reserve management, associations should explore ways to enhance revenue and control costs. Some effective strategies include:
- Tiered Membership Pricing: Offering flexible, customizable membership plans.
- Educational Offerings: Partnering with accreditation bodies to provide paid continuing education.
- Data Monetization: Analyzing and packaging industry insights for members.
- Operational Efficiencies: Outsourcing non-core functions like accounting and content management.
- Zero-Based Budgeting: Ensuring each expense is justified annually rather than carried forward from previous budgets.
GRF Can Help
Determining the right level of reserves is both an art and a science. While financial models provide a framework, open communication with stakeholders and regular reassessment are crucial. Gaining consensus about the organization’s risk profile can be the biggest hurdle. GRF can advise you how to integrate ERM, assist with strategic planning, and provide models for data-driven decision-making. Together, we can make sure your reserves serve as a tool for long-term growth and not just a rainy-day fund. Contact us online, or at the information below.
