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: , ,

Wedding, Funeral, and Other Services Income

Posted on June 18, 2013 Written by

Question: When a pastor performs a wedding, funeral, or other event and is paid, does he/she have to claim that money as taxable income?

Answer: Yes, wedding/funeral/speaking gifts to a pastor are considered taxable income. These gifts usually go straight to the pastor and are often not given by the family through the church. Keeping it off the church’s books is the cleanest and simplest.

More Info: A way to use that money for ministry is this: the pastor takes the money from a wedding/funeral, records it for his/her taxes, then gives it to the church into a designated fund (“Pastor’s Ministry Fund”) which only the pastor can access. Then, during the year as the pastor has meals, buys books, buys a gift for someone, etc., the pastor can pay for that expense out of the designated fund. That expense won’t affect the church’s budget (because it’s a designated fund), the pastor gets a tax break on the gift he/she received because the gift was donated to the church, and the pastor gets to use that money for something related to his/her work AND there is proper oversight because the money is run through the church (meaning, it is subject to a review by members of the Finance or Audit Committee – that oversight protects the pastor lest someone accuse him of spending money frivolously). It is a neat way for the pastor and church to get a win/win.

 

Lead On!

Steve

Filed Under: church administration, church finances, 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: , , ,

Left-Shoulder Giving

Posted on May 28, 2013 Written by

The blog post “Bell Curves and Giving” discusses the average age of your givers and shows that donors in their 50s are the single largest contributors to churches and non-profits. That is the age range on which churches most rely to support their current and future programs. If you visit a church where the average age is older than 60, then that church is likely in decline (unless there is a major endowment supporting the church).

The top of this bell curve are the 50-somethings. The 60-somethings and older form the right shoulder and it is shoulder with a steep downward trend. The overall amount of gifts from 60-, 70-, and 80-somethings declines very quickly for several reasons

  • they are not earning as much as they used to and therefore can’t give as much
  • they are trying to not outlive their money so they restrict what they give to their church and instead will give it as a bequest (if the church cultivates that gift)

The left shoulder is formed by 20-, 30-, and 40-somethings.

  • They are just getting started in their marriages, careers, and families
  • They often make poor financial decisions about cars, houses, and furnishings they purchase.
  • Many end up paying off credit card balances for years or decades.
  • Others are paying down college debt or establishing college funds for their own children.
  • Some are doing all of the above!

Left-shoulder donors have less disposable income than they want to have. They really, really want to give to their church, they just can’t. Churches should and must help them – almost no one else is doing something to address this need. When a church helps a left-shoulder giver get out of or decrease his debt, many pay it forward through their church. This seems self-serving but there is a biblical viewpoint to this – helping people, especially young adults, to understand that our society makes an idol out of money and that distracts them from worshipping God.

Every church with young people (hopefully that means every church) should have classes on Dave Ramsey’s Financial Peace University or Crown Ministries. Everyone in the church should read Randy Alcorn’s The Treasure Principle and/or Andy Stanley’s Fields of Gold. These classes and books provide resources that help people approach money from a rational and biblical point of view, not just an emotional one.

This is an important and urgent matter. If you don’t think it is, try this: take the current giving levels on your bell curve and fast forward 10 or 20 years to see how much money your church will have (realizing that many right shoulder donors will die). That should be a wakeup call to see how significant it is to develop left shoulder donors as fast as possible. Then, when these left shoulder givers are in their 50s or even before, they can be generous givers to their church and the causes that appeal to them.

 

Lead On!

Steve

Filed Under: church finances, generosity, leadership, wisdom, young adults Tagged: , , ,

Revenue Projections Spreadsheet

Posted on May 21, 2013 Written by

Projecting church gifts is difficult but not impossible. If you have a few years of giving history and a good spreadsheet, you can get a pretty accurate forecast of how much a church will receive in a current fiscal year with a high degree of statistical confidence, about 98%. I use this with the most important revenue stream for a church, gifts and offerings, but it can be used for any revenue stream that is relatively stable (no major fluctuations from year to year).

To do this, you’ll need at least four years’ worth of giving data with totals by month. The more history you’ve got, the more accurate your projection will be. If you keep up this spreadsheet, each year, the forecasts will get more accurate. Here’s how to do the financial forecast:

  1. Look on the Free Resources tab for the Annual Revenue Projections spreadsheet and open it.
  2. Fill in the church’s or organization’s name
  3. Change the “Year’s Row” to reflect the years for which you have data
  4. Enter all the data for all the years prior to the current fiscal year
  5. Enter current year data through the most recent month in the current year’s column
  6. Change the formula in the row “Through the rest of year”
    1. If you have current year data for seven months, then change the formula in B20 to add up the giving for the last five months of the year.
    2. Repeat for all prior years – you want to add up in row 20 the amount given in each respective prior years’ last five months
    3. The current year’s row 20 cell cannot follow the pattern of the previous cells because there isn’t any data to add. Instead, average the percentage data for all the previous years.
    4. This step, #6, is crucial – it is the only step that is changed each month. As you input data for the most recently completed fiscal month in the current year you’ll need to change what months are added in row 20.
    5. The spreadsheet will give you a figure in “Projected Total as of EOM” (end of month). That is the forecasted receipts figure based on the data you have so far. I suggest copying that figure into the row underneath for the appropriate month so you can see from month-to-month how the forecast changes.

I’ve used this spreadsheet for about 10 years and it uncanny how accurate it is when you’ve got six years of prior giving history and six months of current year giving data. In fact, give the spreadsheet a test: since you know what the total giving was for your most recently completed fiscal year, enter the data as if that year were still in progress and see what the model forecasts with six months’ of data or seven. Compare the forecast with the actual year-end figure to see if it was within a statistical margin (4% or less).

The model isn’t flawless but it is about 98% to 99% accurate. Your Finance Committee will be impressed! This spreadsheet does not account for variances that skew giving such as major gifts or deaths or departures of major givers so consider those events when entering your data. Make sure you save this spreadsheet to your files so you can update it each month.

 

Lead On!

Steve

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

Financial Statements – Statement of Receipts & Expenses (Part 3)

Posted on April 23, 2013 Written by

Part 3: Expenses

Expenses are the longest section of an R&E statement. It is typically divided in ministry departments according to how the church staff and programs are structured. Ideally, this part of the financial statements has an increasing amount of detail and all of these layers are stacked so they create synergy.

  • The top of the pyramid is the mission of the church – the further down you go there is more detail but all that detail must support the mission of the church
  • The next layer consists of the various departments. All of these must be on the critical path of the church’s mission. If there is a department that is not central to the purpose of the church, that section should be eliminated. That could be painful and/or emotional, but that program is using resources (people, time, and money) that should be used for the main thing.
  • The next layer, and usually the final one, is made up of the individual line items that support the ministry (which supports the mission). If there is a line that does not support the programming area or the church’s mission, then than line should be eliminated.
  • For purposes of creating the budget, I recommend that yet another layer of detail be created on a spreadsheet (see sample in Free Resources at www.financeforchurches.org). This spreadsheet give explicit detail of every expense from every line item. This enables the budget lines to reflect combinations of smaller amounts or similar expense types to form one large line item.

The numbering system in the chart of accounts should have some reason

  • A number system should have five digits at a minimum. Some organizations use a department prefix of two or three digits followed by a four or five digit line item number. This is effective for larger churches. Small and mid-sized churches can use a five digit line item number where the second and third digits specify a ministry department. For instance: missions can be X2XX0, discipleship can be X3XX0, worship is X4XX0, etc.
  • Increase the numbers by 10 or 20 to provide enough space to insert new expense lines as you grow and the church changes. That means the fifth digit is almost always a zero when a chart of accounts is created.
  • The third and fourth digits can specify the same type of expense across ministry area. For instance: continuing ed in missions can be X241X, in discipleship it can be X3410, in worship it can be X4410, etc.

Spending should only be done against line items which have a budget figure

  • Too many times the financial administrator doesn’t know to what line item an expense should be charged so he creates a new line. But there’s no budget for that expense and unbudgeted expenses means that money is being spent which the church didn’t authorize.
  • Put all expenses in budgeted lines. You may need to move the expense to another budget line later through a journal entry. Or, with the authorization of the Finance Committee take an existing budget line and divide it to create two lines with budgets and put this expense in the new line.

As I mentioned in the post on Receipts, income that is received against a specific expense should not be in the revenues section. Instead, there are a couple of ways to show this in the program expense section.

  • Create a line for income in that ministry expense area. Receipts that are posted here will show up as a negative because they are a “negative expense” (which means income). This method clearly shows the receipts and helps with financial transparency.
  • The other way is to net receipts and expenses in the same line so that figure on the published financial statement is a combination of both income and expenses. It is impossible to see from that one number how much was spent or received.

Grouping expenses into one line is sometimes a legal necessity and sometimes common sense and sometimes creates financial flexibility. from members Here are some examples:

  • Personnel classes
    • It used to be common for churches to have line items for each salary and each benefit for each minister. This creates a huge chart of accounts but it also invades personal privacy and thus creates some legal issues of confidentiality. Churches will do much better to create just two classifications:
      • Salaries & Housing
      • Benefits
  • If necessary, salaries can be differentiated between ministerial staff and support staff.
  • If necessary, benefits can be differentiated between Employer FICA, Retirement, Insurance (Health, Dental, and Disability).
  • Instead of keeping track of personnel expenses in a document which is frequently handed out to the entire church, the financial administrator should have a spreadsheet which tracks all personnel expenses by person and by category. Go to Free Resources at www.financeforchurches.org to see the Personnel Spreadsheet template which you can adapt to your own church’s needs.
  • Office Operations
    • Unless you have a very large office, it is more effective and efficient to put all your office expenses into one line called Office Operations. This includes items such as copy paper, office supplies, toner, copier expenses, postage, etc. If anyone wants to know how much was spent on one of these items, that information can be obtained by running a vendor report or printing out the general ledger detail for that line. All office expenses are the “cost of doing business” and usually don’t amount to a lot so it makes sense to group them together.
    • Utilities
      • Some churches have line items for each utility. I strongly encourage churches to have one line for utilities and put all expenses into that one line. This may decrease the number of questions from members who may focus on the church’s utility bills and not be as concerned about the main purpose of the church.
      • If anyone wants to see the amount of utilities expenses, give them the utilities spreadsheet (see Utilities Spreadsheet in Free Resources at www.financeforchurches.org) or run the general ledger detail with all the information. Using the spreadsheet helps the building committee members see the use of various utilities month-by-month and year-by-year.

Putting expenses into broad categories speeds up the process of entering bills to be paid and that can be a big time saver to the finance office.

As with all financial statements, the R&E Statement must provide relevant and timely information which helps the appropriate committees and team make good decisions. If the financial statements are not providing that information, then the statements must be changed so they meet the needs of the committee unless that same info can be obtained elsewhere (such as the utilities spreadsheet).

 

Lead On!

Steve

Filed Under: accounting, church finances, church financial statements 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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