1 Bank Account

Posted on July 16, 2013 Written by

The rule of thumb is that a church needs just one bank account for its financial needs. If you have more than one account, you are incurring additional bank charges, taking up staff time to transfer funds and reconcile bank accounts, and constantly tracking all the changes and balances.

I recognize the concern over the FDIC cap of $250,000 but there is a way around that ceiling; see this post for that info. The CDARS program is a legal tool which can insure up to $50 million, and if you have even more than $1 million in a bank account, you should consider investing that in a way that has better returns than a bank.

I’ve seen organizations that didn’t have a cash flow problem, but prior church leaders were leery of exceeding the FDIC cap so they opened bank accounts—lots of them. One had nine accounts and another had an astounding 20 bank accounts (including three that were never on any financial statement). When one organization had an audit, the auditors spent scores of hours tracking funds flowing from one account to another, and that increased the audit cost by tens of thousands of dollars.

Another concern with multiple accounts is that it can make it easier to hide malfeasance by an employee. Tracking so many accounts is hard and if one is omitted from a financial statement, then after a while that account can be tapped by an employee for personal purposes. If you only have one bank account, it is pretty hard to leave it off the balance sheet!

I strongly encourage all organizations to have just one bank account. However, there are times when a church needs more than one account. When a church has cash flow issues, it struggles to make its regular payments, and its leadership doesn’t have the fiscal control to ensure they don’t spend too much, then there should be a second account. That second account will receive transfers from the main account and hold funds until those funds are needed for payroll, debt service, or other critical expenses.

Unless you have an incredibly good reason to have more than one account, please close all your excess accounts, save the church some money and time, and make your financial reporting more efficient and transparent.

Lead On!

Steve

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

Church Fellowship Budget

Posted on July 9, 2013 Written by

Decades ago many churches decided that they would be intentional about church fellowship, so they created the Wednesday night supper followed by the mid-week Bible study and children’s programs. This system worked well till about the mid-1990s. For the past several years, this form of fellowship has encountered many problems, and increasingly churches are finding it hard to continue this programming. Some churches are overly wedded to the Wednesday night supper and view that time as the most important fellowship activity in the life of a church.

 

Fellowship is critically important to a church. I wholeheartedly believe in and appreciate fellowship times. Many, if not most, church fellowships involve people coming to the church for a food function. I’ve been blessed countless times with Pot-Luck Suppers, Dinners on the Grounds, etc. But I want to challenge the church of the 21st century to think outside the box regarding fellowship. In fact, I want to challenge the church to think outside its four walls and into its community.

 

The purpose of fellowship is for church folks to get to know each other in venues and activities outside of Sunday worship and Sunday School. This is an opportunity for people to talk about football, children, work, etc. in a “non-churchy” setting. This is a time for people to get more closely acquainted, to hear one another’s heart concerns, to laugh uproariously at stories and jokes, to make memories which will be recalled in years to come, and just to enjoy being with each other.

 

I realize that Wednesday suppers are a good attempt at accomplishing this goal, but frankly they don’t reach their intended goal. Here is an alternative: planning family-oriented events which are held outside the church grounds at least on a quarterly basis.

 

Three to six times a year, the fellowship committee of the church can use its budget to find, promote, and schedule events which put the church members into their community. For instance, the church will attend a baseball game together, have a bowling night, have a picnic in a local park with inflatables, or plan a weekend retreat at a beach or mountain locale, etc.

 

The idea is to involve the church in its own community and to be identified as a church. Too often the community sees the church as the people who attend and stay inside the building at a specific address. We all know that the church is not a building; it is the people, and they must be integrated into their community. Jesus himself spent a lot more time wandering around villages and cities than he did inside a synagogue. Jesus knew the value of being out and about instead of in and within.

 

How will this affect the Wednesday fellowship and activities? That is for each church to decide. I think many will decide that those funds could be better used to fund these events outside the walls of the church. If a church will conduct a study on how best to use their limited financial resources, they may determine that there is greater impact on their neighbors by having fewer but more significant events outside the church’s buildings. Will this affect current age-level programming on Wednesday evenings? Yes, and this is an opportunity for the church to be creative: to decide if it should change its age-level programming, to think about new dates and times to implement new opportunities, to “think outside the box” in ways that will help the church reach its community with the Good News of Jesus. Doing the same thing again and again isn’t reaching our world very well; in fact, it’s often not even reaching our own members very well.

 

Think creatively – after all, we are made in the image of the Creator, our incredibly imaginative God!

 

Lead On!

Steve

Filed Under: budget, church administration Tagged: ,

Church Debt #2

Posted on July 2, 2013 Written by

My previous post was a primer on church debt. In this post, I want to focus on the interest rates that churches pay. There is a simple way for churches to pay less in interest and use that money for staffing, buildings, programming, or additional payments on the principal.

First, indicators that you should refinance:

  • If a church has an interest rate that is more than 1% over the current market rate, then refinance
  • If the church’s current terms are less than 12 months from renewal, then refinance
  • If the church needs additional capital for a project AND the church’s debt-to-budget ratio is less than 200%, then refinance and include the additional amount in the new mortgage

One of the biggest questions facing church finance committees on the subject of refinancing is whether to get a fixed or floating rate interest note.

  • A fixed-interest-rate note is just that: for the life of the loan, you’ll always pay the same interest rate. It is easy to budget for this and there is a measure of certainty and even security in knowing exactly what the monthly mortgage bill will be. This is a good tool for small amounts.
  • A floating-interest-rate note is pegged to one of two interest rates: US Prime Rate (set by the US Federal Reserve and major US banks) and LIBOR (an acronym for the London Inter-Bank Offered Rate and is set in London as a basis for international loans). Floating rates can be either higher or lower than fixed rates – it is all dependent on the financial world. note that many banks will allow floating rates to be changed to a fixed rate at some time during the five year period.

No one knows what the interest rates will do over the next five years, yet that is exactly what finance committees are trying to guess. Do they lock in a fixed rate for five years to have a stable figure for the budget, or do they try to pay less with a floating rate knowing that if they’re wrong, the floating rate could go sky high before they can lock it in? Here’s my suggestion as to which interest rate tool a church should use: BOTH.

Instead of trying to guess either/or, do both/and. The church should take its current loan and get the bank to finance half in a fixed-rate note and half in a floating-rate note. Each month the church will make its regular principal and interest payments from its budget and capital campaign receipts. Then, as the church receives additional gifts toward the debt, the church will make additional principal payments against whichever note has the highest interest rate (fixed or floating). This is important – you want to first knock down the debt of whatever note has the highest interest rate. This may change during the course of the debt: the floating rate may go higher than the fixed or vice versa, but you always want to pay down whichever note has the highest rate, not the one with the highest debt.

This is a simple concept which may take your bank a while to accept, because it is not to their advantage. But this is God’s money – use it to the church’s advantage!

Interest Rate Hedges or Insurance: The financial world has come up with many tools to decrease the perceived risk in interest rates. My experience is that these are usually balanced in favor of the bank and they are not worth the extra cost to the church.

 

Lead On!

Steve

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

Church Debt #1

Posted on June 25, 2013 Written by

Many churches have sizable amounts of debt. Too often this debt hampers the church from paying its staff properly, maintaining its buildings adequately, or funding its programming sufficiently. Let me be clear: I despise church debt and encourage every church to do everything it can to get out of debt ASAP. Church debt is nothing more than giving money to a bank when the money should go elsewhere.

 

That said, I understand the reason for debt: to get some money up front to enable the church to construct facilities which will draw in people who can then provide additional receipts to pay for the staffing, buildings, programming, and debt.

 

I also understand that banks like to loan money, and they’ll tell a church that the debt limit is three times their annual income (much like a homeowner’s mortgage). I disagree: anything beyond two times will hamstring the church financially for years to come (much like a homeowner’s mortgage!). If your church’s debt is over 200% of your annual budget, you need to have a capital campaign to eliminate your debt as soon as possible or at least reduce it to a manageable level. Please pay attention to your debt.

 

All debt has three components:

  1. Time: Church debt is commercial debt in that it almost always has a five-year repayment time period. It is not like a homeowners’ mortgage which lasts 30 years but instead, church notes are a five-year note with a “balloon” at the end. The balloon means that the bank knows you won’t pay it all off during the note’s time limit of 5 years, so that means you’ll pay it all off in a balloon payment at the end of the time period OR you’ll refinance the debt (the latter is almost always the case). However, the bank bases its fee schedule on a 30-year note to keep the monthly mortgage payment low enough for the church to pay.
  2. Amount: This varies from church to church based on the need. I’ve seen churches do foolish things such as giving in to the desire to obtain a short-lived item and then putting that cost into the mortgage. For instance, some churches want a van so badly they’ll take that expense and add it to the mortgage, which means they’ll pay for that van for 30 years—about 20 years longer than the van will last. Please make sure you only finance things that will last at least the life of the mortgage.
  3. Rate: See my next post on this subject.

 

Church bonds: I’ve never been part of a church that floated bonds. However, I’ve seen churches use a bond issuance very successfully. This is a creative way to finance a church’s capital needs. Most of the bondholders will be the church members who will give money to the church to pay off the bonds. Occasionally someone from outside the church will buy a church bond.

 

It does take some money up front to work with the bankers and lawyers to get all the legal work done so ensure that you have some capital before you start down this path. Some churches encourage bondholders to gift their bonds back to the church during the course of the note. For instance, sometime people give a bond to the church at Christmas: they’ve “forgiven” the debt, so the church no longer owes principal and interest on that specific bond. Throughout the life of the bond, the church will pay out interest to the bondholders – the interest is paid from funds raised and gifted by members. Also, bonds are bought back by the church as the church has funds available.

Lead On!

Steve

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

Moving Expenses

Posted on June 11, 2013 Written by

Question #1: If the church creates a form which states that an employee agrees to repay the moving costs if their employment is voluntarily or involuntarily terminated before two years of service are completed, does this constitute an employment contract or cause concerns regarding the At-Will employment laws?

Answer: A moving contract is fine. Just to be on the safe side, I would include a sentence in it to the effect that the moving allowance does not constitute an employment agreement and that the at-will employment laws of the respective states are completely applicable. You might even tell the employee that any repayment would be first taken from their pay and if there is still a balance the former employee would be expected to reimburse the church.

Question #2: If the church gives money to a new employee to cover moving expenses, is that money considered income, non-taxable income, or is there a way to give the money/cover the expenses without it affecting the employee’s income all together?

Answer:

  1. Publication 521 from the IRS is a doc from the IRS which details everything there is about moving expenses. Download a copy into the church’s “IRS Forms & Publications” folder in your church’s server. Whenever you need to, send that Publication to the employee to whom it applies.
  2. There are two ways to go about this:
    1. Give a lump sum to the employee and add that amount to the employees’ W-2 at the end of the year.
    2. Reimburse the employee for expenses based on receipts/invoices turned in.
    3. Either way, the employee must keep track of all invoices, bills, expenses, etc. and either turn them for reimbursement or list them on their next 1040 as an itemized deduction. It is a lot of paperwork to keep up with, but it is well worth it so that the employee does not have to pay taxes on the lump sum or pay out of pocket for the expenses incurred.
    4. On the church’s side, the easiest method is to give the new employee a lump sum payment and have the employee keep track of all his paperwork without turning in anything to the church. That makes things very easy and simple for the church (which is why I recommend it) and makes the employee responsible for his expenses. It also encourages the employee to be frugal; the less he spends on the move, the more he can keep in his bank account!

 

Lead On!

Steve

Filed Under: budget, church staff Tagged: ,

QR Codes

Posted on June 4, 2013 Written by

QR codes are free. Get a QR code for your webpage for online giving. Print the QR code in every week’s bulletin and remind people they can give online by scanning the QR code in the bulletin. Keep the CR code in the same place in the bulletin so people will know where to look for it each week. For the increasing number of people who don’t carry cash, this is a simple way to facilitate electronic giving (after all, everyone carries a smartphone everywhere but wallets are disappearing).

Lead On!

Steve

Filed Under: budget, church administration, church finances, strategy Tagged: , , ,

Financial Statements – Statement of Receipts & Expenses (Part 2)

Posted on April 16, 2013 Written by

Part 2: Receipts or Revenue or Income

The section listing receipts is always first in the R&E Statement and it is usually one of the smallest.  There are several factors to consider as this section is made:

  • There should be one line for every major revenue stream on which the organization depends. For most churches and non-profits this is one or two (sometimes three) lines such as gifts & offerings, bequests & memorials, and maybe endowment transfers (from your own endowment).
  • Some churches have separate revenue line items for gifts from members versus non-members or gifts from members who pledged versus gifts from non-pledgers. Unless you are using that information for reports and to make decisions there is no reason to separate those gifts. They were given for the operating budget as undesignated gifts so put them all in one line (keep it simple).
  • Small, inconsequential, and occasional revenues should be grouped together into an “Other Receipts” line which may or may not have a budget attached to it. Do NOT create a revenue line for every revenue source – it will make your document unwieldy.
  • Revenues from sources for which there is a direct expense should be in the expense section netted against the actual expense or in a revenue line (actually it is a “negative expense line”) just above the expense line. For instance, many churches have weekly suppers; the receipts from the
  • Transfers to the operating budget from designated funds should not be in the income section. This is not new money but merely a transfer of existing money to offset an expense. To show designated funds transfers as new money is disingenuous.
  • Gifts to designated funds should always go through the appropriate fund on the balance sheet, not through the R&E Statement. To do otherwise will inflate the total amount of operating budget receipts of an organization and make it seem like there are greater revenues from its primary revenue stream than there really is.
  • Budgeting receipts is not simple – you cannot take your annual expected figure for receipts and divide by twelve because every church and non-profit gets a significant bump in December. December is the 13th month because typically twice as much money is received in December as any other month (actually, for most churches the last week of December nets as much revenue as any other month). I created a spreadsheet to help calculate what you should budget for receipts for each month. Here’s how to use that spreadsheet:
    • Go to www.financeforchurches.org and under Free Resources, open the spreadsheet titled Monthly Gifts & Offerings Budget Calculation
    • Insert your church’s name in the title
    • From the Annual Revenue Projections spreadsheet (template is also under Free Resources at www.financeforchurches.org) get the total giving by month for all the years for which you have data. Put that data in column B by the respective month.
    • Delete the respective columns K through Z according to the total number of years for which you have giving data and that automatically changes the figure in  column C (Total # of Sundays). (To delete a column or row – click on the column or row symbol which highlights it, then right click and select “Delete”).
    • Make sure that column E has the correct number of Sundays for the current fiscal year (the formula gets the figure from the list of Sundays to the right on the spreadsheet)
    • In cell I19, type in the annual budget for receipts. The spreadsheet will calculate the monthly receipts figure for your new budget year based on historical giving and number of Sundays in the current year.
    • Take the monthly budget figures and put them into your financial software so that you know what an accurate figure for receipts is for each month, especially December.

When church finances get tight, the initial desire is to cut expenses. Most churches can cut their expenses by 5% without affecting their ministries too much for a year or two. However, the other side of the equation is receipts – most churches should increase their revenues by at least 10% if not 20% based on the financial ability of their members. But asking people to give more is harder than asking a few staff members to cut their budgets. I strongly encourage churches to do both/and: cut expenses AND raise income. It will make your church stronger in the long run.

 

Lead On!

Steve

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

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: , , ,
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