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: , , , ,

How to Calculate a Church Budget

Posted on January 8, 2013 Written by

Every church I’ve worked with has struggled with determining the amount at which to set the subsequent year’s budget. Everyone wants to increase the budget in order to provide more funds for staffing and programming (rarely for building needs, but that is another matter). But Finance Committees know that even if they put a figure out there, it means little if the income/receipts/revenues don’t come in to support that budget target. Committees want to step out in faith, but they also don’t want to be caught overstepping (and dropping into a financial void). So, what’s a church Finance Committee to do?

Here’s my idea:

  • In the month that you set the budget for the next year, look back 12 months and calculate how much money came in during that period. That figure is your budget for the next year.
  • For instance:
    • Your fiscal year is the calendar year
    • In July and August, ministry areas work on their respective budgets with a deadline to get their requests to the Finance Committee by August 31
    • The Finance Committee gathers all the data to finalize the budget by September 30 so that it can be voted on in October
    • At their July meeting, the Finance Committee looks at the total undesignated receipts for July 1 through June 30 (the previous 12 months). That figure is the new budget for the fiscal year that starts in January (six months away).
    • Whatever that increase (or decrease) is over the current fiscal year, that percentage (up or down) is communicated to all the ministry areas as to how much they can increase (or decrease their budget.

This has many benefits:

  • This is a conservative or fiscally prudent way of budgeting – churches should receive at least that amount in the next 12 months, perhaps a good deal more.
  • This means that you shouldn’t have to go into spending freezes and hurt the morale of the staff and church
  • This enables the church to continue to plan well for its ministries and not feel it is over-reaching financially
  • If more money comes in than was budgeted, the extra money can be used for capital needs, rainy-day or reserve fund(s), money for unforeseen opportunities, additional money for budgets that were shorted, etc.

This process makes short work out of deciding how much you’ll budget for the next year. That will enable the Finance Committee to focus on more important things such as assisting ministers, ministries, and members with good stewardship practices.

Lead On!
Steve

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

Overhead Costs?

Posted on January 1, 2013 Written by

What is the overhead cost for a church and what percent of the budget should it be? That’s not easy to answer – there are lots of variables. Take a look at this article to see what this research shows.

http://www.greymatterresearch.com/index_files/Nonprofit_Overhead.htm

Why is this important? Because you should know what are your fixed costs and your variable expenses (although, at some point, ALL costs are variable if the church closes it doors).

Overhead costs are expenses which can be made more efficient in many cases. Take a look at what you’re spending your money on and see how you can save some money. Your only regret will be in not having done it sooner.

 

Lead On!

Steve

 

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

Gift Letters or Statements of Contribution

Posted on November 14, 2012 Written by

Gift letters (also knowing a statements of contribution) have several purposes:

  • To acknowledge and thank donors for their gifts
  • To ensure the church received the gifts and credited them to the correct fund
  • To give members a chance to see how much or how little they’ve given to their church
  • To provide an opportunity to the church to include a letter explaining to donors how their gifts were used and the people whose lives are being changed because of the generosity of the givers
  • To instill confidence by donors in the integrity of the church’s Finance Office so they can see that the staff is handling gifts accurately

Gift letters should have all of the following elements:

  • Name and address of the church or 501(c)(3).
  • Logo of the organization would be great, too.
  • Tax Identification Number of the organization. This is known as a TIN; sometimes it is called an EIN or FEIN (Employer Identification Number or Federal Employer Id Number)
  • Name and address of giver
  • List of checks which includes
    • Date of gift
    • Form of gift – check number, cash, online, or other description of manner of gift
    • Amount of gift
    • Purpose of gift – was it for the ministry budget, building, missions, etc.
  • (Pledge – if you use pledges, they should be on the letter, too)
  • Total of all the gifts by category and grand total
  • Thank you sentence from the Finance Office and who to contact if there are any errors
  • Sentence required by the IRS for tax-deductible gifts. Here is the one I use:
    • For IRS purposes, I must inform you that the gifts contained in this letter are based on intangible religious benefits. You did not receive any goods or services from _____ Church for this contribution. Please keep this letter as documentation of your gift.

Every time you send out gift letters, you should be accomplishing all of the purposes listed above and your giving statements should have all of those elements. Anything less means you’re not getting as much value as you could.

Maximize the impact of your gift letters by including a cover letter which has several additional elements:

  • Paragraph 1 – several sentences thanking people for their generosity (please use that term – it doesn’t have any negative connotations and is viewed very positively by people; people like to be told they were generous)
  • Paragraphs 2, 3, and 4 – three brief stories that have happened at your church within the past 3 months where people were changed for the good because of what your church did, events that had an impact on children or youth such as a mission trip or Vacation Bible School, and/or activities that reached the community or world with the Good News of Christ. Tell stories – people remember stories; if parables were good enough for Jesus, they’re good enough for you, too!
  • Paragraph 5 – conclude the letter with another acknowledgement of their gifts and generosity. Also, mention who and how they should contact if there is an error in the giving statement.

Finally, how should you send them: I like sending them out by email because it is free. Society has trained people that email is normal, so use what society has taught people. For people without an email you’ll have to use snail mail. In a few instances, you’ll have to use snail mail for some situations where people’s giving needs to be kept confidential from another person in their home who has access to the family email – those are rare and sensitive, but you need to be aware of those. Snail mail costs about $1 for each letter (postage, envelope, paper, ink, and labor) whereas email costs just the labor (which you have to do anyway).

Lead On!
Steve

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

Generosity Index

Posted on October 5, 2012 Written by

You need to know about the annual Generosity Index  which is an interesting measure (at least to us numbers geeks) of how generous people are. This link is to the 2011 publication of the 2009 tax data. The compilers gather data from the US Internal Revenue Service (Canada is in the survey but in this blog I’m referring only to the US). They gather data by state:

  • Total amount of income on all the tax docs filed
  • Total number of tax filers
  • Total number of tax filers that made a charitable contribution
  • Total amount given to charities

The data is sliced and diced in two primary ways: 1) percentage of total aggregate income given to charity and 2) amount of average charitable donation. Those two are merged to get the Generosity Index and then states are ranked by each of these.

It is interesting to see the number of tax filers in a specific state but we don’t know if these donors gave $10 or $10,000 so I prefer to look at the percentage of income that is given to charities. That percentage is very telling about those who are inclined to be generous with their money. BTW, by far the largest recipient of charitable dollars are churches – no one else comes close.

  • The most generous state is Utah whose residents give an average of 3.09% of all their income to charities. The second is Georgia whose tax filers give away 1.85% of their collective income. There is a big drop from #1 to #2 and that is due to the Mormon emphasis on tithing.
  • The top ten most generous states are
    • 1. Utah
    • 2. Georgia
    • 3. Alabama
    • 4. Maryland
    • 5. South Carolina
    • 6. Idaho
    • 7. North Carolina
    • 8. Oklahoma
    • 9. Mississipp and New York (tie)
  • The top ten stingiest states are
    • 41. Ohio
    • 42. New Mexico
    • 43. Arkansas
    • 44. Hawaii
    • 45. Rhode Island
    • 46. West Virginia
    • 47. New Hampshire and Vermont (tie)
    • 49. Maine
    • 50. North Dakota

Generalizations are rarely correct but there are interesting patterns

  • Many of the most generous states are seen to be very religious (Utah & Idaho with Latter-Day Saints; Georgia, Alabama, South Carolina, North Carolina, Mississippi with Baptists and Methodists).
  • Many of the most generous states are seen as some of the poorest states
  • Many of the stingiest states are in the Northeast: Rhode Island, New Hampshire, Vermont, and Maine which is an area of the US that is considered less religious
  • Is there a correlation between faith and generosity – it would seem so (if we are looking broadly).

Years ago I read that research by Empty Tomb, Inc. showed some interesting statistics:

  • In 1932 the average Christian gave 3.2% of his or her income to the church. This is at the depth of the Depression, when people had less to give than ever before as a nation. It was a very, very tough time for the US.
  • Just before the economic collapse of 2008, the average Christian was giving 2.3% of his income to charity. During one of the most prosperous economic times in the US, Christians were more stingy than during the Great Depression. The figure of 2.3% has steadily dropped since, which means Christians are giving even less.

You can draw your own conclusions from this information. Here are mine:

  • More money does not make you more generous.
  • Generosity comes from the heart, not the wallet.
  • Being poor (a relative term in our country when we compare ourselves to other countries) means you understand better than others the importance of helping others.
  • A person’s faith and religion plays a large role in his or her generosity.

Lead On!
Steve

Filed Under: budget, church finances, generosity, leadership Tagged: , , ,

Building Costs

Posted on August 27, 2012 Written by

An article a few months in a facilities magazine reflected that the true cost of building in not in the architect’s fees, furnishings, or even in the actual construction of the building. The article stipulated that over 80% of costs of a building are in the maintenance and operations of the structure.

Say a building has a lifespan of 50 years. The first year the building is built. The next 49 years the building is used for its purposes. Over the course of the 49 years, the cost of the utilities, maintenance, repairs, improvements, alterations, etc. will cost at least four (4) times as much as the initial construction done in year one. That operations cost (the one over the 49 years) does not include the cost of any personnel associated with that structure: custodians, employees, technicians, etc.

Before (BEFORE) you build a building, look at your budget and your future revenue streams. Does your budget have the financial margin to grow and absorb the cost of a new building. Can you afford the additional utilities and maintenance costs? How will you pay for new heavy equipment and major repairs (e.g., HVAC or a new roof) over the next few decades? (By the way, if you set aside funds 10% of the original building cost into a reserve account to cover those costs, you’ll have enough to cover all major repair costs over the life of that building.) Is your budget healthy enough to add staff to take care of the buildings over its lifespan and ministers to put on programming in that building? Ask these questions ahead of time – you won’t regret it.

Also, before you build, think creatively as to why you’re building. There are some opportunities that if a church is willing to think outside the box, you can leverage a lot of resources. Here are a couple of examples:

  • One church wanted to build a parking deck. Members of a Sunday School class knew that the city also wanted to build a parking deck in that area of town. The city and church worked together – the church provided the land and the city paid for the construction and they got a win/win. The church gets a parking lot it uses for free each Sunday and it didn’t have to pay for the construction; the city got the parking it needed but it didn’t have to buy the land.
  • A church wants to build a recreation center. What if the church worked with a local fitness center: the church offers the land and the fitness center builds the facilities? Church members can use the center for free and the church then has people right next door who may have never gotten near a church – a mission field right next door. And the church didn’t have to find $5 million to build a center and then $200,000 a year to staff the facility.
  • The same could be done with a daycare – collaborate with a respectable day care center to use church faciliites for the benefit of the church, the center, and the community.

Think long-term and think creatively.
Lead On!
Steve

Filed Under: budget, buildings, facilities Tagged: , ,

How Much Debt Should a Church Have?

Posted on July 17, 2012 Written by

Personally, I think church debt should be exactly like your homeowner’s debt: that ratio should never exceed 2 to 1. Yes, a bank will loan you 3 to 1 but you’ll be so strapped financially that you won’t have any disposable cash for doing anything else.

The ratio to the operating budget, my suggestion is 10% or less. Basic economics for a church with no debt:

  • building is about 20%
  • programming (including missions) is about 30%
  • staffing is about 50%

To pay your loan, you’ve got to take it out of one or all three of these. Most of your building costs are fixed (energy and maintenance). That leaves programming and staffing – if you cut those too much, you’ll have a great building with no one to lead and no one to follow.

 

Better to have programming at 25% and staffing at 45% with some growth than to cut to the bone at 20% programming and 40% staffing (which will kill your staff, too). You can grow out of debt, but that takes a lot of intentionality – that is hard when most pastors are trying to manage what they already have and can’t imagine taking on more in order to grow giving and attendance even more than they are already doing.
I’ve worked with some churches that have a 3 to 1 ratio (debt to annual budget), but they are hurting financially. And, their new building will be old and worn down long before the debt is paid off at their current rate. The appearance won’t attract new people, especially a younger generation.

My recommendation, get out of debt as soon as feasibly and fiscally possible. Debt is fine so long as it doesn’t become the boa constrictor that wraps around the church and kills it.

Lead On!
Steve

Filed Under: budget, church administration, church finances Tagged: , ,
« Previous Page
Next Page »