Fixed Assets

I take these off every balance sheet I possibly can. There is no reason for a church (or any other non-profit) to track their fixed assets (land, buildings, and furnishings). CPAs will tell you these must be included on a balance sheet and that is simply not necessary for a non-profit.

Fixed assets are usually listed on a balance sheet for the price they cost. If a building costs $1 million, that is the figure it is listed on the balance sheet. Same for furnishings, building improvements, etc. This figure is what it cost at the time of purchase and that is my hang up. Church pews that cost $100 each 50 years ago now have a replacement price of $2,500 or whatever. Yet, on the balance sheet it is listed as $100 less a full-depreciation of $100. That doesn’t mean anything to the average church member reading a balance sheet. Fixed assets never reflect the current amount of money you need to replace that tangible asset and that is the short-coming a fixed asset and depreciation policy and why it can actually harm a church. People will presume it costs $1 million to replace the church’s fixed assets (which were bought 18 years ago) when the true cost is closer to $5 million.

 

Instead, do this. Remove all fixed assets from your balance sheet. Then, when you do your annual audit or present the annual financial report to the church, have a footnote in the document in which you list the insured value of the physical plant and the furnishings and add in the tax value of the property (land/soil is not insurable because it can’t be destroyed). This footnote tells the reader the current value of what you own (presuming you keep your insurance value updated).

Finally, take a camera (such as your phone) and record every room, every cabinet, every drawer, and every space in your building. It is so easy to do with modern smartphones. Two people can do an entire church in a morning (or a day if it is a very large church). Then, store that recording in different locations or in the cloud so it can be used if need for insurance purposes. Keep multiple years’ recordings, too – don’t discard one after you get a new one.

Please keep your balance sheet simple – no fixed assets, cash only, and keep restricted funds to as few as possible. Thanks!

Lead On!

Steve

Cash Balance Sheet

Cash is King. Especially in non-profits. I’ve spent too many hours trying to get CPAs to understand that in non-profit accounting, there is no need for the balance sheet to list fixed assets, pre-paid expenses, depreciation (in any of its myriad forms), and other forms of for-profit accounting. Sometimes the CPAs get it and follow my lead. Other times they are so entrenched in their methods that they can’t think outside the AICPA lines.

 

A cash balance sheet means that the only thing on the asset side is your cash and where it is located (E.g., “Main Checking-1st National Bank….$47,738.83”). This is known has “how much money do you actually have available to you as of the date of the balance sheet.

 

And, please, please, please include ALL your accounts at ALL your financial institutions. I’ve worked with too many churches who tell me they’ve listed everything only to learn later that there is a discretionary fund, an endowment fund, a benevolence fund, etc. that someone doesn’t want others to know about. That is being dishonest – plain and simple. You’re not revealing the whole truth because someone doesn’t trust others. That is wrong.

 

The other side of the balance sheet is divided in two:

  • How much of the cash you have is encumbered for others?
    • What are your payroll liabilities (money you’ve withheld from employees which you’re going to send to the Federal and State tax authorities, to the employees’ retirement, health or life insurance, or other benefits. That money isn’t yours; you’re just holding it for a little while.
    • The other “liability” is commonly known as restricted funds. Again, this money isn’t yours, you’re just holding it until it is used for the purpose that the donor gave it for. That may be for the music program, for a building campaign, or for benevolence. Whatever it is for, you MUST use it for that purpose and nothing else unless the donor gives you written permission.
  • How much of the cash you have is “left over?”
    • That leftover is known as retained earnings or net assets. That money is truly under the full authority and control of the governing body of the church whether that is elders or the congregation.

A cash balance is simple and that’s the way it should be for churches. You want a document that is clear enough so that a non-accountant can understand it after a 5-10 minute explanation. If you have to go longer, then people are going to think you’re hiding something – and you just might be. Keeping it simple keeps it honest.

Lead On!

Steve

End of Calendar Year Gifts

When it comes to end of year, you need to have careful attention to some details:

  • What is the date on the check?
  • When did it come into the possession of the church?
  • When did it cease to be in the possession of the donor?
  • If it was mailed, what is the postmarked date (and keep the envelope for future reference)?

The IRS says that you can give tax credit for gifts that are not in the possession of the donor as of 1/1 @ 12.01 a.m. So, if someone makes an online donation at 11:59 p.m. or earlier on 12/31, then the gift can go toward that year.

If someone puts a check in the mail on 12/31, then it is no longer in the possession of the donor. The IRS considers it valid for the prior year. It may be postmarked in the new year but it should go toward the prior year, unless the check is dated for the new year. If the postmarked date is January 3, 4, or 5, use your best judgment to decide if it was still in the donor’s possession in 2019 or if it was mailed in 2018. You may even need to call the donor.

For depositing money received in the new year but credited to the prior year: make the deposit to the bank as early in January as possible; in your accounting software put a deposit date of 12/31 so it will show up on the income statement for the prior year. It will show up in the bank reconciliation as a “deposit in transit.”

The date that the money is in the bank is not important; the date that it ceases to be under the control of the donor is. Dealing with stock gifts at this time of year is especially tricky in determining what year to credit it to because you have to factor in when the donor gave instructions to the broker to sell the stock. Talk with the donor and the broker to ensure you have accurate info regarding last minute stock gifts. 

Lead On!

Steve

www.churchbestpractices.org – all kinds of FREE church manuals and sample documents
www.financeforchurches.org – 400 plus blogs on every church administration topic you can think of

Special Offerings for Specific Needs

Churches can have up to four special offerings for missions and other causes in a year – any more than that and it begins to affect the contributions to the ministry/operating budget of the church. Here are some ways to have special offerings that won’t affect your budget offerings

  1. Announce that “On Sunday, Month Day, there will be a special offering to help our XYZ Ministry. While there is money in the budget for XYZ, we need additional monies to pay for additional supplies and events that are planned. The first $XX,000 given will go to the regular budget but all monies given over $XX,000 will go for XYZ. Thank you for your generosity for this wonderful ministry.”
  2. The $XX,000 figure needs to be whatever the treasurer feels is a regular Sunday offering – the amount that would normally come in that Sunday for basic operations.
  3. Promote that special offering for 3-4 Sundays before the date using the offering time to show slides of last year’s event, interviewing people about their experience, etc. Any money received over the threshold helps lower the budget cost of XYZ. And any special offering funds not used for XYZ this year can carry over to the next year.  Alternate what is done each year so there is variety and so these offerings don’t get old.
  4. After the event, tell people how much was raised toward this ministry. If you don’t reach that goal, tell people that, too. You may get some designated gifts for the XYZ Ministry.

Lead On!

Steve

www.churchbestpractices.org – all kinds of FREE church manuals and sample documents
www.financeforchurches.org – 400 plus blogs on every church administration topic you can think of

Hiring an Audit Firm

Hiring an audit firm is not easy but not hard either. The most important thing is to rely on references. Here are questions to ask a reference:

  • How well was the audit done?
  • How fast did they get out to do any field work?
  • How fast after the field work did they get the final report?
  • How many questions did they ask of staff and which staff?
  • What was their price?
  • Would you use them again?
  • Did they meet with management (with no staff present) after it was all done?
  • Did they ask staff if there are things staff wants included in the report?
  • Did they listen to staff’s answers about the way the staff does accounting versus the “perfect” method?
  • How much have they increased their price each year?

Here’s the process I use when searching for an auditor:

  1. Gather a bunch of names
  2. Get them to submit RFPs (you’ll have to give them your financials)
  3. Call references
  4. Invite 2-3 in for face-to-face interviews
  5. Select one
  6. Change auditors after 3-5 years

Lead On!

Steve

www.churchbestpractices.org – all kinds of FREE church manuals and sample documents
www.financeforchurches.org – 400 plus blogs on every church administration topic you can think of

Church Audits

There are several types of audits and here are the iterations

  • Who does the audit
    • Internal Audit – this is done in-house by the treasurer or an independent audit committee. Usually this is free (done by volunteers) and is not in-depth. It is a spot check on the accountant who’s doing the books. I’ve got a one-page sheet describing how this can be done.
    • Independent Audit – this is done by an outside CPA firm and it costs $4,000 to $15,000 depending on how many bank accounts you’ve got and how much they’ve got to hunt for info. The more they hunt, the more time they spend, the more they cost. Keep it SIMPLE!!!
  • Types of audit – usually done by CPA firm but could be done internally.  An outside auditor gives members more peace of mind. Audits done by church volunteers consume a LOT of time which volunteers could be doing something else and it makes donation info available to fellow members.
    • Financial Procedures Audit – this is to ensure that the people handling the money, deposits, checks, cash, bills, etc. are doing it the proper way. Auditors have a checklist of literally about 200 questions.
    • Financial Figures (the first two are not typically good enough for banks to give loans)
      • Review – someone looks at your internally-produced financial statements and states they look okay or not; the auditor will suggest improvements and changes as necessary.
      • Compilation – someone takes a pretty close look at your internally-produced financial statements and mostly replicates those financial statements on their letterhead; the auditor will suggest improvements and changes as necessary.
      • Full Blown Audit – someone spends several days at your place reviewing anything and everything they want and asking a ton of questions. At the end, they produce a set of financial statements that are accepted by banks and lenders and others. They will write up a management letter which tells the top management of the church what things need to be changed, improved, started, and/or stopped. It is thorough. It gives peace of mind to members and donors.

My recommendation:

  1. That the church treasurer or an independent audit committee of church members (not related to the Finance Committee) do an internal audit of the check register and/or general ledger every month
  2. That the church contract with an external/independent auditor to conduct a full-blown audit every other year and include a financial procedures audit. IF the audit firm can state that doing it once a year will be almost the same price as every other year, then do it every year.

The SECRET to a good audit: Have a filing system that is so simple, clean, & clear that anyone can find any document within one minute. I do that kind of system at all churches I consult with. At a recent audit, the auditors were on site for just one day and they had planned three days – that saved the church a LOT of money and got the auditors out quickly. 

Lead On!

Steve


www.churchbestpractices.org – all kinds of FREE church manuals and sample documents
www.financeforchurches.org – 400 plus blogs on every church administration topic you can think of

Monthly Financial Statements

My “Intro to Accounting” professor taught me some basic concepts which have guided me ever since. They are simple principles but vitally important to any and every organization.

 

  1. Always release a complete balance sheet and revenue & expense statement
    • These are the two basic financial statements. At a minimum these should always be released. There are a multitude of other financial reports but these are the minimums. These statements measure different things:
      • A balance sheet is a financial picture of the organization at a specific date. It shows all cash, debts, and restricted funds of a church.
      • A revenue & expense statement is shows how the organization is doing this fiscal year. It should have columns for the total annual budget; the monthly actual & budget figures; and the year-to-date actual & budget figures. Collectively these numbers indicate your current year’s financial status
  1. Never hide or not-release financial figures, even if they will elicit lots of questions
    • Never, ever, NEVER hide anything, period (.).
    • All numbers will come out. You need to be in control of bad AND good news. Hiding numbers only makes you look like you’re hiding things. That will always hurt you.
    • The numbers may look bad but the numbers are not about you but about the organization. Sharing everything allows you to keep your integrity. If the finance office has lost its integrity, it needs new staff.
  2. Release the data by the 15th of the subsequent month. To delay longer than that is to release “stale-data.”
    • There is no reason to delay releasing monthly financial data. Bank statements are available online so the bank reconciliation can even be done on the 1st of each month. There are going to be journal entries and maybe some backdated checks, but frankly, the financial office should be so update that closing each month is fast and routine.
    • Releasing financial data 30 days or later communicates that the finance office does not know what it is doing and/or that things in the financial area are unnecessarily complicated and needs help.

 

The bottom line, release financial data accurately and timely.

 

Lead On!

Steve

Designated Funds and UPMIFA (part 2)

Every church I’ve worked with has designated funds which are dormant. The long-standing rule of thumb was that to re-purpose the money in these funds was that each donor needed to be contacted to request permission to alter the use of their gifts. That is a good rule to use but in many cases, this is not practical or even possible. Fortunately, there is a legal alternative.  It is called UPMIFA: Uniform Prudent Management of Institutional Funds Act.

 

UPMIFA has been passed by almost every state legislature (there are a couple of holdouts) and it is virtually the same in each state. Look at your state’s legal code for the specific language – I’ll use the one from Virginia (where I live) for this post. In all instances the church must consult with a court or the attorney general. If the request is reasonable, they courts will agree to the church’s desires.

 

Below is the actual law from the Code of Virginia. Here are the salient points:

  1. Donors can change the purpose of their gift but it still must be used for a charitable purpose
  2. Judges and Attorneys General can change the purpose of a fund but it still must be used for a charitable purpose
  3. An institution can change the purpose of a fund by working with the Attorney General if the fund is less than $250,000
  4. An institution can change the purpose of a fund by notifying the Attorney General if the fund is less than $50,000, is over 20 years old, and it will be used for a similar purpose

 

  • 55-268.16. Release or modification of restrictions on management, investment, or purpose.
  1. If the donor consents in a record, an institution may release or modify, in whole or in part, a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund. A release or modification may not allow a fund to be used for a purpose other than a charitable purpose of the institution.
  2. The court, upon application of an institution, may modify a restriction contained in a gift instrument regarding the management or investment of an institutional fund if the restriction has become impracticable or wasteful, if it impairs the management or investment of the fund, or if, because of circumstances not anticipated by the donor, a modification of a restriction will further the purposes of the fund. The institution shall notify the Attorney General of the application, and the Attorney General shall be given an opportunity to be heard. To the extent practicable, any modification shall be made in accordance with the donor’s probable intention.
  3. If a particular charitable purpose or restriction contained in a gift instrument on the use of an institutional fund becomes unlawful, impracticable, impossible to achieve, or wasteful, the court, upon application of an institution, may modify the purpose of the fund or the restriction on the use of the fund in a manner consistent with the charitable purposes expressed in the gift instrument. The institution shall notify the Attorney General of the application, and the Attorney General shall be given an opportunity to be heard.
  4. If an institution determines that a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund is unlawful, impracticable, impossible to achieve, or wasteful, the institution, without application to the court but with the consent of the Attorney General, may modify the purpose of the fund or the restriction on the use of the fund in a manner consistent with the charitable purposes expressed in the gift instrument if the fund subject to the restriction has a total value of less than $250,000.
  5. If an institution determines that a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund is unlawful, impracticable, impossible to achieve, or wasteful, the institution, 60 days after notification to the Attorney General, may release or modify the restriction, in whole or part, if:
    1. The institutional fund subject to the restriction has a total value of less than $50,000;
    2. More than 20 years have elapsed since the fund was established; and
    3. The institution uses the property in a manner consistent with the charitable purposes expressed in the gift instrument.

 

Lead On!

Steve