Financial Statements – Statement of Receipts & Expenses (Part 1)

Posted on April 9, 2013 Written by

Part 1: Overview

There are several names for this document:

  • Profit and Loss Statement (P&L)
  • Income Statement
  • Statement of Revenue & Expenses
  • Statement of Receipts & Expenses (this is more appropriate terminology for churches and non-profits; abbreviated R&E Statement in this post)

The R&E Statement is a summary of how well the organization is doing in the current fiscal year. It covers only one 12-month time period. It is comprised of line items which are grouped by classes according to the purposes and mission of the organization. Every line item has a number which helps organize the lines and speeds up the process of entering the information when a bill is paid from that line.

This post will review the major elements of the R&E Statement and factors to consider when creating and organizing it. My guiding philosophy in creating an R&E Statement is “keep it simple.” Making it complicated will lead to unnecessary questions and even worse, fears that someone is hiding something buried in the numbers. Be as financially transparent as possible but don’t make a line item for each expenditure (that’s called a checkbook).

Printed Format: the R&E Statement should have these columns (and this is the order I like):

  • Line item number
  • Line item description
  • Total annual budget for this line item
  • Actual figures for the current month
  • Budget figures for the current month
  • Variance between actual to budget for the current month
  • Actual figures for the current year to date
  • Budget figures for the current year to date
  • Variance between actual to budget for the current year to date

Auxiliary organizations

  • Some churches have wholly-owned and self-supporting subsidiaries. These are ministries which are not dependent on any funding from the church’s operating budget (undesignated gifts) but receive all their funding from other sources. Examples include a bookstore/café, childcare center, or music school. K-12 schools should be separate legal and financial entities and thus must have their own financial statements to keep any legal or financial matter from affecting the church.
  • These auxiliaries are effectively accounting departments in the expense part of the R&E Statement. The monthly financial data of these auxiliary orgs should appear on the church’s financial statements at the very end, after all the data for the church’s operating budget. The first line or two should be the receipts (which are technically “negative expenses” in this department configuration. The rest of the lines are expenses according to the needs of the ministry.
  • The bottom line of this “department” will be the net profit or loss of the auxiliary for the month and year (according to how the statements are printed).

Financial statements are very effective when you compare them year-over-year. If there are major differences (for good or bad) between years, those need to be analyzed as to why the change happened. As time goes by and needs change, financial statements must adapt to the current situation. Line items will change, ministries will begin and end, and revenue streams will ebb and flow. The R&E Statement is organic and the financial administrator must ensure that it changes each year to meet the needs of the church in ways that enhance transparency.

Finally, it is the responsibility of the person who created the financial statement and who input all the receipts and expenses to then interpret the data to the financial oversight committee. The financial administrator must be able to answer all questions fully and truthfully and the committee must be willing and empowered to ask hard questions.

 

Lead On!

Steve

Filed Under: budget, church administration, church finances, church financial statements Tagged: , , ,

Disaster Registry

Posted on April 2, 2013 Written by

A few years ago a massive earthquake devastated Haiti. About 300,000 people died, and a million others were left homeless. Even years later, people are living in tent cities. The poorest country in the western hemisphere was shattered by this event, and the world responded. Tens of millions of dollars were sent; thousands of volunteers traveled to the island to build homes, provide medical care, distribute food, and meet other needs. Haiti was an example of nature at her worst and humanity at its best.

But there were a few not-too-bright spots. Cholera had been eradicated from the island but some UN workers brought in the disease which killed thousands more and added to the already overburdened medical crisis. Well-meaning donors gave clothing and household items, some of which were senseless in Haiti: heavy coats, chandeliers, gloves, and other things from (mostly US) attics. Haiti needed money, money, and more money. Then it needed skilled workers to coordinate unskilled volunteers in various areas such as construction and health care. While Haiti did get that, it also got a lot of unnecessary junk which now the aid organizations have to figure out what to do with.

After Hurricane Sandy pounded the US northeast in October 2012, a plea went out for the same types of things that Haiti needed. And again, the US and other nations responded. And again, relief providers received items that were not needed. In the midst of the relief efforts and clean up after Sandy, some enterprising young people saw the well-intentioned junk that was being delivered and decided to do something. Occupy Sandy knew exactly what was needed, and they knew that the US would respond if we knew what to provide. So, they created a wedding registry at Amazon.com. Yes, that’s right, a wedding registry.

The wedding registry is actually several for the various communities of New York and New Jersey. Each registry is different because the needs are different in each neighborhood. The idea is simple: a donor reviews the items in the registry, buys the items, and then Amazon ships the item to the appropriate Occupy Sandy office for them to use. The donor then gets a tax deduction and, more importantly, the knowledge that he or she provided exactly what was needed. That alone will create warm fuzzies!

There are several opportunities for churches and non-profits to take this knowledge and use it:

  • Create a registry now and advertise it to your church. This registry will be for items that are needed for mission trips and projects. Make a list, check it twice, advertise, and then thank people for their gifts.
  • Relief organizations should have a registry now. While you won’t get many people buying things before a disaster, when the disaster strikes, it will be easy to direct people to your website where you’ve already listed everything that is needed and where you can add to it as you see new needs.
  • Any number of different kinds of registries can be created for any number of needs: from schools to community organizations to camps to anything.

Be creative in what you list, but make sure that the items pertain to your work. Don’t put in items which require much explanation or might make you be defensive (those can be funded elsewhere in your budget). And do the list NOW. Don’t wait till the emergency strikes; do it now while you’ve got the time to think and get input from others.

 

Lead On!

Steve

Filed Under: church administration, generosity Tagged: ,

What Are You Reading?

Posted on March 26, 2013 Written by

Getting your staff to read together is really important. I recommend that all staffs read two or three books together every year. It will help keep everyone on the same page, and they’ll talk about it in the halls and at lunch in addition to the planned discussion times. Some of these books may be good for some key committees to read together, and that will help the key leaders be on the same page, too.

I suggest a variety of books on different subjects. Church staffs expect to read books about churches, but what about good biographies of strong leaders (Rockefeller, Jobs, Roosevelt(s), missions stories (Peace Child), business (Good to Great, The E-Myth Revisited), social justice , prayer (The Prayer Circle), or the status of the church in America (American Grace). There are thousands of good books to choose from on any number of subjects—and not only with church-related themes. Fiction such as the Narnia series, the Lord of the Rings trilogy, and even the Harry Potter series provide Christ-centered truths. The reading list does not have to be limited to C. S. Lewis (good as he is).

Well-written books will also help your staff members speak and write better as they see some best practices. Book discussions will help the staff communicate more and better with each other to explain their point of view in a non-threatening way (after all, it is “just” a book). And, eventually the staff will have a bookshelf which will impress office visitors (that’s my weakest argument!).

Get the staff to make suggestions. The reading list may start with the pastor’s choice, but it must include good and worthy selections submitted by other staff. The pastor will certainly want to use a book to help the staff focus on a specific topic, but the pastor should not be the only person selecting titles.

Finally, it will be interesting to see just how people read the books—in print or electronically. Each has advantages and detriments. Each method appeals to different types and ages of people. That alone can be worthy of a discussion of how society and the church are changing, and then you can discuss the contents of the book!

 

Lead On!

Steve

Filed Under: church staff, leadership, strategy Tagged: , ,

Postage Meters

Posted on March 19, 2013 Written by

There are two primary postage meter companies: Pitney Bowes and Hassler. Both provide excellent products which can help an organization stamp its outgoing mail very efficiently. The United States Postal Service is getting into the business with Stamps.com, by which you can print out your own postage in your office.

The problem is not in the efficiency but in the effectiveness of having a postage meter. Meters are designed to be time savers; that is their whole purpose. There isn’t much direct savings in using a meter except to accurately weigh outgoing mail to get the correct postage. However, organizations use first-class postage probably 85% or even 95% of the time, so that figure is well known. It should be easy to add the correct postage almost all the time. On the other hand, every organization has examples of someone running an envelope through the meter and then realizing there is a much higher figure on the meter left from a previous user, and those errors sometimes cost lots of money.

Meters rent for about $150 a month to several hundred dollars per month. In a year, that is at least $2,000, which translates to about 4,347 first class stamps (2013 postage is at 46 cents).

$2,000 is a lot for small to mid-sized churches, especially when that money doesn’t save the church any money, just some time. I believe that churches with smaller budgets (and thus smaller postage budgets) should not have a postage meter at all. It will take time for the staff to affix the correct postage and for the staff to go to buy several rolls of stamps, but the time saved is much less than $2,000 (or more if you’re renting a bigger meter).

Also, postage meters typically have a five-year contract, and contracts automatically renew (I hate that feature!) if you don’t cancel several months in advance. That locks you in for another five years at $2,000 a year. Another situation is that postage meters get the new postage rate when it goes up. The church office could instead buy the “forever” stamps at the current rate and use them for several months. Yes, that only saves you a penny or two per letter ,but “a penny saved is a penny earned.” And using www.stamps.com from the USPS is like paying a premium for your stamps and the convenience of not leaving your office. This costs $16 per month for small users so if you use $200 of stamps each month, your average first-class stamp costs 50 cents (4 cents more than the current cost).

Here’s my recommendation:

  1. Call your postage meter company to cancel your contract (even if you have several years to go, do it now so  you don’t forget later).
  2. Wait until your postage meter contract expires.
  3. The week before your postage meter contract ends, go buy a month’s worth of stamps and give the stamps to the heaviest users in the office. Do not buy too many; you don’t want to have too much money tied up in stamps in case some of the stamps “walk” out of the office.
  4. Then about once a month, resupply your office with the needed stamps. If you send packages, you may need a postage scale (available from any office supply store) and a variety of stamps of various amounts (but not too many of those).
  5. Then, use the money budgeted for the postage meter for something else in the office.

Lead On!

Steve

Filed Under: church administration, church finances Tagged: ,

Total Income or Total Return Investing for Church Endowments

Posted on March 12, 2013 Written by

There are two major philosophies when it comes to how funds should be invested for the long-term benefit of the organizations holding the assets.

The Total Return Method

  • Modern portfolio management states that a return of 8% per year is something that should be expected.
  • Return is defined as total appreciation of the investment portfolio: this includes realized and unrealized gains/losses, interest, income, and dividends
  • US inflation has averaged 3% per year since 1928
  • A fund should always “plow back” at least 3% of its total appreciation per year into the total investment portfolio
  • That leaves, on average, 5% of the total appreciation which can and should be expended each year for the benefit of the organization for which the portfolio was created
  • The legal courts have ruled that foundations and endowments should spend 4-6% per year of their total investment portfolio on the purposes for which the donors gave the money
  • Distributing 4-6% and retaining 3% means the investment portfolio will always have the original purchasing power at the time of the gift
  • It also means that the investment portfolio will be invested in ways to achieve maximum

 The Total Income Method

  • For several hundred years, investment managers invested solely in income-producing financial instruments
  • Each year, the organizations “harvested” all or most of the investment income
  • Investing for total income results in a very different financial portfolio than investing for total growth
  • Inflation was not taken into consideration when investing for income
  • Over time, the portfolios invested in income-producing financial instruments were eroded by inflation and the organization used up the corpus to maintain its operations

Today, no major foundation or endowment uses Total Income; all have switched to Total Return. And, all use a 12 (or 16 or rarely a 20) quarter trailing average. That means they look at the past twelve quarters (3 years) and take the average of those quarters and then multiply that average by the 4-6% to be distributed. Looking back over 3, 4, or even 5 years flattens out many roller coaster curves of investments. Most foundation board decide each year what the distribution rate will be but it is almost always between 4 and 6% (e.g., sometimes 4.5%, sometimes 5.8%, etc.) depending on the financial investment returns for the prior year.

I could go on for about two more hours, but I won’t.

Lead On!

Steve

 

Filed Under: church finances, church financial statements Tagged: ,

Financial Statements: What Are They Good For?

Posted on March 12, 2013 Written by

 

There are two essential financial statements:

Balance Sheet

This shows the current financial status of the organization since its inception. It lists all the bank balances, the designated and restricted funds (a heavily used and very good tool for non-profits), reserve accounts, debts and equity (the summary of all years’ receipts over expenses).

Income Statement (aka, Profit & Loss Statement, Statement of Revenues & Expenses, Statement of Receipts & Expenses)

This shows how well the organization is doing in the current fiscal year. It doesn’t take into consideration previous years (that is on the balance sheet). It should have annual budget to track actual expenses against what was forecasted.

  • Other financial statements are the designated funds summary (a very useful tool to track receipts and expenses in designated, restricted, and reserve funds) and statement of cash flows (to show how balance sheet money has been used).
  • Notes in financial statements are an excellent way to answer questions before they are asked. The rule of thumb is that if there is an extraordinary expense or receipt, it should be explained in the notes. Notes can also be used to explain variances from month-to-month and to give a heads-up about an upcoming expense or receipt.

But what is their purpose? How should this financial info be used?

Financial statements are not scorecards. Some organizations measure all progress in financial terms. This is a mistake. It’s like measuring a child’s progress strictly by his grades or her height. There are many, many nuances to finances that cannot be put in numbers. Financial statements are not THE measurement, they are A measurement.

Financial statements are not insignificant. Just as financial statements are not the absolute yardstick, they should not be ignored, either. There is a reason for every number on a statement. Some numbers are more important than others and it is up to the staff and finance committee members to decipher which figures should be analyzed further. Financial info should never be discarded.

Financial statements should lead to questions. Financial statements should never be taken at face value. They are a reason to ask questions, especially hard questions. All questions are good – some are purely explanatory, some may lead to defensiveness by the staff (and those ought to be explored further), and some may lead to more questions to get to the root of an issue. The oversight committee must never be afraid to ask good, tough questions and not be satisfied with easy and quick answers. This is the committee’s responsibility, to do less is negligent.

Financial statements are a decision-making tool. This is the ultimate purpose of financial statements: to aid in making critical decisions for the organization. Financial figures are one part, albeit very important, in making sound strategic and tactical decisions for every organization. This means the numbers and the reason for the important numbers must be fully understood and explainable. Then, use that knowledge to provide financial insight to critical decisions. An important decision that does not have financial input is not a fully thought-out decision. Make sure financial info is included in the process for making vital decisions but that finances are not the sole rationale for any decision.

Lead On!

Steve

Filed Under: budget, church finances, church financial statements Tagged: , , , , ,

New Income and Revenue for Churches

Posted on March 5, 2013 Written by

A brief audit of a client’s receipts over the past year revealed something interesting: 22% of their income came from sources other than the primary source. The organization has diversified their approach to receiving income so that more than one in five dollars comes from a non-traditional source. This means that if their primary revenue streams remain the same, this organization will have 20% more money to use – woohoo!

This is a good lesson for churches: are you dependent on your mainstay revenue source (tithes and offerings) or have you begun to look at other revenue streams? Churches must be creative in getting money in the door and then very transparent in how it is spent and used. Here are 21 different revenue streams (the first 10 come from a list prepared by George Bullard and the rest are from me):

  1. Special offerings
  2. Tithes and Offerings
  3. Designated gifts
  4. Fee for Services
  5. Capital Campaigns
  6. Foundations of the Organization
  7. In-kind resources and services from individuals and businesses
  8. Sale of Products
  9. Foundation grants
  10. Investment Income
  11. Rental Income
  12. Event Registration
  13. Cost Recovery
  14. Business Partnerships
  15. Offerings After Special Events
  16. Sponsorships and Scholarships
  17. Ownership of Facilities
  18. Memorials and Memorial Gifts
  19. Capital Investment Lists
  20. High Capacity Donors
  21. Gratitude Gifts
  22. Alumni Gifts
For a fuller description of these, visit Free Resources at www.financeforchurches.org
Lead On!
churchfinancialleadership.blogspot.com
Filed Under: budget, church administration, church finances, planning, strategy Tagged: , , , ,

Church Staffs Just Wanna Have Fun

Posted on February 26, 2013 Written by

One of the many legends about Google as a work environment is the different places they created for their staffs to have fun. It’s not just work at work, there is some fun involved, too – by design. The folks at Google (and tons of other companies) realize that employees need to have their brains stimulated in new and creative ways, the staff need to decompress even during the work day, and they need do things together so that they can bond and bind together as a team. Coming to work, doing just work, going home and then repeating that ad naseum creates a workplace that can lead to employee burnout.

Here’s a solution for churches:

  • Allocate $1,000 from your church budget to be spent $250 each quarter (feel free to allocate more, it just depends on the size of your staff)
  • Divide your staff into four groups and assign each group a quarter of the year.
  • Each group is tasked with finding something fun, creative, and new for the staff to do and they’ve got a budget of $250. It may cost a little more and then each staff person might have to chip in a couple of bucks, but try very, very hard to not make this an expense for the staff.
  • Find one day each quarter when the church is closed for a “staff development day” (if you can only do a half day, that is okay, too)
  • Then, close the church, put a volunteer on the switchboard, and go have fun. Once you do this a few times, it will begin to change the way the staff interacts with each other. They will recall fun times, goofs by each other and themselves, etc.
  • This will create memories that are NOT church or work related. The staff will have something to talk about other than work. This will create a much healthier work environment.

Here are some suggestions:

  • Bowling
  • Painted pottery
  • Movies
  • Tour of a local historical site
  • Team Hide & Seek in a mall
  • Paintball
  • Ropes course
  • Kayaking or canoeing
  • Frisbee golf
  • Scavenger hunt
  • Raking leaves for a shut-in
  • Habitat for Humanity home build

You get the idea. Some of these ideas are free; some are not; all are beyond the walls of the church. Some are outside the comfort zone of a few staff; none are difficult; all are different.

Go have FUN with your staff!

Lead On!
Steve

www.financeforchurches.org
www.facebook.com/financeforchurches.org

Filed Under: church administration, church staff Tagged: ,
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