Financial Reserves- How much should an association have?

I had a great question today from one of my favourite clients. They are a membership organization of about 1,000 members. They are in the fortunate position of being well-endowed with cash and their finance committee is trying to decide how much to set aside in reserves. Here’s what the CEO told me. “The committee is proposing 2 years of operating expenses, which I think seems really large – even 1 year of operating reserves seems like a lot to me. What is the norm?”
Personally I agree with her finance committee. Two years is a good, prudent amount of reserves. I have seen organizations go through 2 years of reserves so quickly it would make your head spin. It’s not as much as it seems when you run into difficulty or have a large investment to make. However, this amount of reserves is rare for a membership organization. Most just can’t do it.
The vast majority of Canadian membership organizations have less than a year in reserves. We do a benchmark survey every year and the typical range of reserves is 3-6 months of operating expenses with the average nearer the 3 month mark. The survey highlights for 2012 are on this page – scroll down to the section entitled Financial Reserves. http://www.zzeem.com/BenchmarkSurveyforMembershipOrganizations.aspx.
So if you want to be “normal” you could have 3 months of reserves and be part of the majority. But if you want to be safe- have a least a year in reserves. Also, to ensure you’re on the right side of the CRA, make sure you have documented what you have planned for the reserved cash (e.g. operating reserve, investment in new software, staff, marketing, PR, etc.) so it doesn’t look like you’re simply stockpiling it.
Some accountants will tell you that the CRA “does not allow” NFPs to have more than 6 months of reserves. This is bunk. However, if the CRA audits you, they will expect to see that you have a plan for your reserves and this must not include any plan to return it to members- either directly, in the form of cash, or indirectly, as a reduction in membership fees or services.