Associations and other not-for-profits that operate their organizations like a business are often times more successful than ones that do not! I often get the question ‘what is the right amount of operating surplus for our organization?’
While I would like to take credit for this well written article on the ‘Operating Surplus” credit must go to the Canadian Society of Association Executives (CSAE and Sandi L. Humphrey, CAE)
I particularly appreciate the sample policy that follows the article……………………..
Sandi L. Humphrey, CAE
Each year not-for-profit organizations establish an annual budget. In most instances, budgeted expenses are closely tied to budgeted revenues – in other words, what comes in goes out, in the form of services to your members, donors and/or stakeholders. Any excess of revenue over expense on a yearly basis is considered operating surplus. The amount of that surplus varies widely from organization to organization.
Different schools of thought exist on the appropriate level of operating surplus in the not-for-profit sector – in reality there is no “one size fits all” solution because each not-for-profit is different. Many suggest the ideal amount is somewhere in the range of 50% to 100% of annual operating expense. Thomas Kriens, Kriens-LaRose LLP Chartered Accountants, (Are your assets jeopardizing your non-profit status, www.csae.com/resources) suggests:
Generally, an accumulation of assets to provide for six to nine months of operating expenditures is considered acceptable. A non-profit organization may hold more than six to nine months of operating expenditures if it can be shown that there is an immediate requirement for a material portion of the assets held.
According to Brian Watson (Canadian Association Management, Chapter Seventeen, Canadian Society of Association Executives, 2005), “Although non-profit associations are not established to make large profits, it is to their benefit to build reasonable reserves to be used in an emergency or other unforeseen occurrence. Some of the internally restricted types of reserves commonly found in the financial statements of associations are contingency reserves, working capital reserves and reserves for retiring allowance.”
What the Board Should Know
Every Board should give due thought to the amount of surplus appropriate in their organization. To help determine what level of operating surplus is appropriate, the Board should, at minimum, consider and answer the following questions:
f your operating surplus becomes too large, might your charitable or not-for-profit status be at risk? (Ask your auditor for guidance and recent decisions of the Canada Revenue Agency.)
If your organization’s cause or mission becomes irrelevant at some point in the future, if government enacts legislation that makes your organization redundant, or, if your organization amalgamates with another at some point in the future, are there sufficient funds in place to provide appropriate severance and support to your employees and satisfy all other obligations?
Are your revenue sources secure? Are your revenue sources diversified? A not-for-profit that relies on a significant annual grant, for example, should ensure it has a reserve fund significant enough to buy it time should that grant be pulled unexpectedly. Similarly, an association that relies heavily on membership dues would be smart to shield itself from an economic hardship on the part of its membership that may result in a significant number of non-renewals.
After considering and responding to the above questions, the Board should set out in policy its expectations of the Chief Staff Officer (CSO) with regard to surplus funds.
A Policy Sample
Note: items requiring discussion and/or editing are capitalized and underlined.
POLICY TITLE: OPERATING SURPLUS
POLICY TYPE: EXECUTIVE AUTHORITY
Preamble
The Board of Directors of ABC ORGANIZATION has determined it is in the interest of the organization to establish and maintain an operating surplus to provide protection in the case of an economic downturn or other unanticipated financial stress.
Policy
With respect to the organization’s surplus, the Board has determined that the annual surplus shall be established and maintained at X% of annual operating expenses.
Accordingly, the Chief Staff Officer shall:
a) Effective the XXXX fiscal year, allocate a contribution to the operating surplus of not less than X% of budgeted annual revenue as part of the expense budget until the goal of X% of annual operating expenses is achieved.
b) Once the operating surplus goal of X% of annual operating expenses is achieved, continue to budget annually an appropriate amount to maintain the operating surplus at that level.
The Board reserves the right to modify the above during the annual budget approval process should special circumstances or the needs of the organization demand in order to maintain a balanced annual budget.
Monitoring
To satisfy the Board that this policy is being complied with, in (INSERT MONTH HERE) of each year, the Board shall review the auditor’s report to confirm the budgeted contribution to the operating surplus has been properly applied, and determine if this policy needs amendment.
Board policy on the surplus isn’t an option – the Chief Staff Officer needs clear direction in this regard. And the Board needs to answer some important questions as they consider what level of surplus is appropriate. Is it time your Board did so?
