Insights
CID Reserve Expenses: What Gets Funded with Reserves, and What Doesn't
By
Travis Honings
Reserves typically fund expenses and liabilities that are either anticipated or unexpected, providing financial security and stability to an organization. Here's what commonly gets funded with reserves and what doesn't.
What we typically fund for reserves:
Future Maintenance and Repairs - Reserves are often used to cover the costs of future maintenance, repairs, and replacements of assets such as buildings, equipment, and infrastructure.
Emergency Expenses - Reserves can be used to address unexpected events or emergencies, such as natural disasters, equipment failures, or sudden market changes.
Legal Liabilities - Funds may be allocated from reserves to cover legal liabilities, settlements, or litigation costs that arise from disputes, lawsuits, or regulatory compliance issues.
Capital Expenditure - Reserves may be utilized for large capital expenditures, such as acquiring new equipment, or investing in security or technology upgrades.
Debt Servicing - Reserves can be used to make debt payments or to build up funds for future debt obligations, such as bond repayments or loan amortizations.
Things we would typically not fund with reserve funds:
Operating Expenses - Routine operating expenses, such as salaries, utilities, and day-to-day operational costs, are typically funded from current revenue rather than reserves.
Dividends or Distributions - Reserves are not typically used to pay dividends to shareholders or distributions to owners. These payments are usually made from profits generated by the business.
Investment in New Ventures - Funds for launching new ventures, expanding into new markets, or pursuing growth opportunities are usually sourced from capital raised through equity or debt financing rather than reserves.
Regular Debt Payments - While reserves can be used for debt servicing in emergencies, regular debt payments are usually budgeted for and covered by operating income.
By allocating reserves appropriately, organizations and associations can ensure they have the necessary resources to handle future obligations and unexpected events while maintaining financial stability and sustainability.