This question comes up for association boards frequently. The key to this question is understanding the association and nonprofit industry standards and then being able to measure these standards.
How much should we keep in our association reserves?
After living through the last recession, this question comes up frequently, and the answer is “it depends.” However, the industry standard is 50% of the budgeted association’s expenses for the year. If you budgeted $500,000 of expenses for 2015, you would want to maintain $250,000 in reserves. The theory is that the reserves allow you to operate status-quo for six months (assuming no other income was coming into the organization) and during that time, the board can evaluate and make decisions on the future direction of the organization. Of course, your amount of reserves may be different, especially if you are involved in some multi-year or high-risk ventures that require a long-term contract.
When your board discusses the reserve policy, they should also discuss how you will retain the funds. Will they be held in highly liquid accounts such as money markets or certificate of deposits, or should they be invested in the stock market? Discuss the level of risk your board feels comfortable with. We recommend that when your finance committee meets annually, both the reserve and investment policy is reviewed and discussed. It is a great time to chat with your CPA/auditor and investment manager.