The foundation of most reserve policies is based on future risk. The policy is developed so that reserves are only available when economic, environmental, political, or social events require additional funding to cover lost revenue or unbudgeted expenditures.

Prudent boards usually know to set aside money to mitigate the financial impact of declines in membership or meeting attendance, as well as unforeseen legal actions and information technology data breaches.

But a sound reserve policy must also anticipate funding for strategic initiatives that help increase the association’s value to members. It should give equal consideration to future risks and opportunities, as well as the association’s ability to remain relevant while continuing to advocate on behalf of members.

Here’s how to allocate reserves for future risks and opportunities.

Step 1: Identify Risks

Developing a comprehensive strategic reserve includes elements of enterprise risk management. ERM is a process, implemented by an association’s board of directors, executive management, and other staff personnel, to identify potential events that may affect the association’s bottom line.

A sound reserve policy should give equal consideration to future risks and opportunities, as well as the association’s ability to remain relevant.

Key risks may include costs related to IT security, legal actions, human capital, member or event shortfalls, or increases in lobbying and advocacy.

ERM requires assessing the likelihood of each risk and its financial magnitude and quantifying the result as a component of the total reserve. When conducting these risk assessments, it is critical to include executive management as well as board members to ensure broad consensus on the identified risks and resulting reserve strategy.

A big payoff from carefully calculating risk: reasonable assurance of the association’s continued ability to achieve its objectives should anything unfortunate happen. 

Step 2: Identify Opportunities

Identifying and quantifying strategic opportunities is the second element of a comprehensive strategic reserve. As constituents who benefit directly from associated-provided services, board members play a key role in identifying these occasions to increase member value.

Some associations create an opportunity fund as part of their reserve policy. As new initiatives are developed, a detailed proposal outlining member value, timing, costs, and anticipated return on investment is reviewed by a committee consisting of executive management and board members and ultimately presented to the full board for final approval.

New initiatives might include a new educational program, membership marketing plan, or enhanced online publications. Each new initiative is reviewed annually for acceptable ROI and its relevance to the member experience. Other strategic opportunities might include purchasing or acquiring a trade show based on geographic or content value-add or monetizing an existing line of business through the creation of a limited-liability company. 

One additional consideration in developing your reserve target is your association’s ability to raise large amounts of capital. Associations with corporate members are generally able to raise significant capital in a short period through a special assessment, while individual membership associations may not be. A funding model will often play a key role in driving an association’s reserve levels.

Today, there are so many challenges and risks facing associations as they strive to provide high-quality value to members. These challenges, coupled with numerous, far-reaching world events, are driving associations to develop a more targeted approach to reserve policies. By identifying both risks and opportunities, an association can craft a reserve policy that maintains financial stability in the event of reduced revenues, and at the same time, provide funding for strategic initiatives to enhance member value in the near future.