A common question among nonprofit associations is how much they should hold in reserve assets. There is a “rule of thumb” that associations should hold six months of operating expenses in reserve.
Is this common rule of thumb common practice?
A study conducted from 2020-2021 by the American Society of Association Executives (ASAE) titled, “Association Investment Policies, Practices, and Performance” provides insight1. The study was based on a survey of 158 trade and professional associations. The size of organizations surveyed ranged from those with operating budgets of less than $1M, up to $100M.
The table below is from the study and shows the total reserves as a percentage of current operating budget. To illustrate how to read the table, see that 16% of all associations studied have reserves equal to 50-74.9% of their annual operating budgets (2nd column, 5th row of the table).
Here are some observations from the table:
- Most associations studied, or 63%, have reserves equal to or greater than 50% of their current annual operating budgets.
- 37% choose to hold 100% or more of their current annual operating budgets in reserves.
- Larger organizations tend to hold more in reserves compared to smaller organizations. 53% of associations with annual operating budgets of more than $25 million have reserves equal to or greater than 100% of their annual operating budgets.
- Only 32% of associations with annual operating budgets of less than $1 million have reserves of 100% or more of their operating budgets. This same group also has the highest percentage of respondents, with less than 25% in reserves.
- Although the table has some clear observations, it’s worth pointing out the wide range of responses. This suggests that each organization is unique in its need for reserves.
That data suggests that many associations hold 50% (six months) or more of their annual operating budgets in reserve. Although the “rule of thumb” does seem to be common practice among the responding organizations, it’s important to note that all associations are unique.
What works for one organization might not be what is best for another.
That is why we always suggest thorough planning around cash flow requirements, asset allocation, and long-term goals to help inform what might work best for your association.
What does it mean to be Truly Cared ForTM? It means we understand your passions and use proven methods to help you reach your goals. If you need help with planning your reserves, give us a call.
1 https://www.asaecenter.org/publications/113234-association-investment-policies-practices-and-performance-20202021-edition-pdf
