Christian Spencer, CPA, is a partner at audit, tax, and consulting firm RSM US, LLP, in Washington, DC.
Figuring out how to use reserves and other techniques to deal with the financial fall out from the pandemic has been top of mind for most associations. Here, three organizations share how their reserves and other financial policies helped them survive these tumultuous times.
No two associations are identical. Revenue streams and concentrations, reserve policies, and liquidity vary. As a result, different approaches have developed as associations look to successfully navigate the challenges presented during the pandemic.
Many associations wonder how others have used reserves and other tools at their disposal to navigate the financial challenges of the past 19 months. Here’s a closer look at the tactical approaches taken by three different organizations.
The Vision Council has two events representing approximately 75 percent of annual revenues. Due to its reserve strategy, the Council has been able to continue operations and member services, despite a significant loss of revenue from the cancellation of both events in 2020.
“The Council has a long-established policy that reserves should be no less than 75 percent of our annual operating expenses; however, over time, due to the success of our events, our reserves have exceeded 100 percent of operating expenses,” said Brian Carroll, chief financial and operating officer.
Not only did it meet its strategic goal of digital education, but AAOA was also able to repackage its 2020 programs for on-demand access, similar to a Netflix subscription or Disney vault model.
The Council used reserves to partially cover lost event revenue. In addition, the Council instituted cost-cutting measures: reductions in staff bonuses and program expenses, negotiating rent deferrals with its landlord, and seeking to actively sublease its excess office space. And once eligible, the Council successfully received a Paycheck Protection Program loan.
The Council also established a $2 million line of credit, collateralized by its investment portfolio, so that the group does not have to immediately liquidate reserves during a decline in financial markets. “Communication and coordination between governance, management, and our investment advisors enabled us to proactively anticipate cash needs and liquidate the investments at a time that was most beneficial to us,” Carroll said.
The Toy Association has two events that represent approximately 80 percent of annual revenues. However, having event-cancellation insurance covering communicable disease was a big financial help for the association in the early days of the pandemic.
“During our February 2020 show, our exhibitors from China were not permitted to enter the United States, and, as a result, we were able to successfully file a claim with our carrier for this lost portion of revenue,” said Paul Vitale, executive vice president, finance and operations. “Consequently, we got an early foreshadowing of what was soon to come.” Insurance proceeds fully covered the financial impact of the cancellation of its October 2020 event as well.
“Looking ahead, we knew that 2021 was going hold more uncertainty than 2020 in terms of events and the ability of some of our members to renew. As a result, we positioned ourselves by liquidating some of our reserves to protect the earnings value once the market had rebounded from its March 2020 lows and provide liquidity,” Vitale said.
The association’s reserve policy is to maintain 65 percent of operating expenses as reserves, but the actual reserve had been running a bit higher—at 85 to 90 percent—over the past few years. It was a good thing the association took these and other steps because both of their tradeshows were canceled in 2021.
The American Academy of Otolaryngic Allergy (AAOA) has a well-established policy requiring nine to 18 months of expenses be held in reserves. A portion of the reserves over 18 months are permitted to be invested in new programs.
In January 2020, prior to the onset of the pandemic, the group strategized to retool some of its programs by digitizing content. This forward-thinking approach served AAOA well once it was forced to cancel all live events in 2020. Not only did it meet its strategic goal of digital education, but AAOA was also able to repackage its 2020 programs for on-demand access, similar to a Netflix subscription or Disney vault model.
In addition, AAOA successfully negotiated and canceled all three hotel contracts at no cost. “Due to our strategic planning in early 2020 that focused on the digital future of the meeting experience, with the help of a production company, we were able to successfully pivot our annual meeting to a virtual platform,” said Jami Lucas, executive director and CEO. “Our meeting costs significantly declined, and we were able to charge a reduced fee to virtual participants which resulted in higher overall participation.
“In addition, the group was able to reach and engage a new subset of members. “Going forward, we anticipate a hybrid approach to our meetings,” Lucas said. “Certain problem-based discussions will be in-person, while other aspects of the meeting will be on-demand.”
Although AAOA has not had to tap into its reserves thus far, Lucas is looking three years down the road to get the true impact of the pandemic. “We anticipate our members’ income will be down, and we will need to continue to always analyze our service offerings to remain relevant,” said Lucas.