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