Can we make it the 45% rule instead?
The rule of thumb in our community is that an association should have an amount in reserves equal to 50% of its budget, just in case the organization’s financial position begins to deteriorate. So, for example, if I am the CEO of a $10 million association, I’m looking to accumulate $5 million in my reserve fund as expeditiously as possible. It makes complete sense, right?
Of course it does, and that’s why I can’t resist mucking things up by proposing a minor edit: let’s make 45% instead. And with the other 5%, let’s invest in the work of innovation for the future. After all, it’s a rule of thumb, not a rule, regulation or law, so we can make it whatever we want it to be. And just imagine the extraordinary impact that 5% of your reserves would have on the pursuit of innovation in the community your association serves!
There are great reasons to pursue this alternative. First and foremost, by investing 5% in innovation, you will be making a powerful statement that you value the creativity, energy and passion of the people who make up your association more than markets or financial instruments. Second, building a deep capacity for innovation creates tangible and intangible benefits for your association that will never come about from even the most successful portfolio of investments, including new ideas, new capabilities, brand equity, member engagement and new revenue streams. And finally, if your innovation efforts produces a winner, the financial upside to your future reserve fund investments could be quite considerable. Surely these attractive opportunities are worth an investment of 5%?
Well, I know what you’re going to say…we don’t like to take risks. You don’t think you’re taking risks in the market? Yes, I know you’re carefully managing your portfolio and doing the other stuff all smart investors do. That really isn’t the point, however. Risk is an element of today’s operating environment and present in every choice that leaders make. No amount of careful planning, smart implementation or wishful thinking will eliminate it altogether, nor do we want to eliminate it. (It would be incredibly boring and routine to run an organization in an environment of zero risk, wouldn’t it?) So, the issue isn’t whether your organization “likes” to take risks, but how much risk you’re willing to accept. And if you’re investing any of your reserves in the market, you’ve already decided that you will tolerate some risk in exchange for a certain level of reward.
Unfortunately, you exercise absolutely no control over the rewards the market will bring you. But you do have levers you can pull when it comes to innovation. By taking a strategic approach to innovation, your organization can invest its 5% in ways that minimize and manage risk by limiting uncertainty and controlling financial exposure, while maximizing whatever upside a given idea may produce. You can’t get away from risk, but you can take steps to make it work for you.
So, I’m thinking that just about every organization around could make do with 45% in reserves instead of 50%. I’m also thinking that the 5% your association invests in innovation will be, in the long run, the best investment it ever made.
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