Church Budgets: Top 10 List (part 2 of 2)

Posted on February 25, 2014 Written by

[See last week’s post for part 1.]

6. What are the percentages that should be used as a rule of thumb?

A church spends money on three things and the rule of thumb is that you should spend the following ranges on each of these areas:

  • Staffing: 40-60%, ideally about 50%
  • Programming: 20-35%, ideally about 30%
  • Buildings: 15-25%, ideally about 20%

Percent of WHAT? There are two ways to measure this

Operating Budget – the budget is an easy and pre-defined way to measure. These percentages can be seen even before the first dollar has been given to the budget for that year.

All Actual Receipts – a better way is retrospective by looking at the prior year’s expenses on all areas and all receipts. This is more complicated but it gives a better result.

  • Look at ALL RECEIPTS not just operating budget (all monies received for all causes and purposes): operating budget; mission offerings; events, trips, and activities; food service; designated gifts; etc. Count everything that comes in.
  • Look at ALL EXPENSES for each area. There are many expenses paid from designated funds which are not part of the operating budget. Count all those expenses.
  • Do the math to get the most accurate percentage of where the church is spend all of its money. Most churches will end up spending far less on staffing and building than what is in the operating budget and a lot more on programming.

 

7. What about capital budgets?

  • Capital budgets are monies that are used for major building expenses such as new heating and air conditioning equipment or gutting and overhauling rooms.
  • Capital expenses often don’t fit into the operating budget and thus are paid from capital campaigns, the generosity of some members, creative finances, funds leftover at the end of a fiscal year, or a combination of some or all of the above.
  • Most churches cannot afford to put a line their operating budget for capital expenses – their current operating budget is too tight. However, all churches must face the reality of capital needs and thus must have a plan for how to handle these expenses.
  • All churches should have a list of capital needs facing the church over the next ten (10) years. That gives the church’s leadership an idea of how it needs to plan financially to face the certainty of aging equipment, leaky roofs, inefficient heating units, etc.

 

8. Can you use designated funds in the budget development process?

Yes and you should. Some people prefer to give to specific purposes and not to the operating budget (a better term is “Ministry Budget” or “Mission Budget”). It impossible to pre-determine how much will be given to designated funds but you can have an educated figure.

Designated funds are secondary, not primary sources of the budget for that purpose. Plan your operating budget first and then plan the “what-if opportunities” for monies given to the designated fund.

 

9. To whom is the budget presented?

  • The more the better. Tell as many people as possible about the budget. The more people that know and understand the goals of the budget, the more “buy in” you’ll have when it comes to funding the budget.
  • Use different times and places. Be creative in how, where, and when the budget information sessions are held. Different groups meet at different times, so leverage those meetings. Use different people to do the talking, too – it shouldn’t ever be the same person doing all the speaking.
  • TELL STORIES – budgets are never about numbers. Budgets are ALWAYS about people. So, when you make the presentations, tell the stories (beginning, middle and end) about how people will be changed and helped because of the money given to the church.

 

10. How do you anticipate and prepare for the questions will you get?

You can’t. But you can be prepared by knowing as much about the budget, its process, and its leaders as possible. Don’t spend time trying to anticipate questions; spend time with people (especially young leaders) so they’ll understand the goals of the church and how the budget plans to work toward those goals.

When you have Q&A times with the church, don’t let just one person handle all the questions. Ask all committee leaders (missions, worship, youth, education, etc.), all Finance Committee members, all staff ministers, and other key leaders to come to the platform.

  • The church will then get to see who made the decisions regarding the budget. Usually, those are a score or more of trusted leaders, not just one committee working in isolation.
  • The people on the platform can best answer detailed questions about their respective area. The Budget Committee leader may not know why the guest musician budget line has that figure, but someone else does.
Filed Under: budget, church finances, church financial statements Tagged: , ,

Church Budgets: Top 10 List (part 1 of 2)

Posted on February 18, 2014 Written by

This week I am posting #1-#5 of the Top 10 considerations regarding church budgets. Stay tuned for the remainder of the list next week.

 

1. Why do you need a budget?

A budget is a tool – nothing more.

  • It is a yardstick to measure your progress toward planned goals.
  • The planned goals are the most important aspect of the budget, not the financial numbers.
  • The financial numbers are ONE indicator of how well the church is doing toward achieving these goals, but it is not the ONLY measurement.

Budgets must be developed holistically

What do we want to accomplish in our youth ministry, worship area, building maintenance, staffing needs, etc.?

How are we going to reach these goals using our resources?

  • People: staff, volunteers, and paid vendors
  • Money: from all sources, not just budget
  • Time: when do we plan to achieve these goals

Ideally, budgets look forward over several years, not just the next few months. The Budget Committee should always be looking at how the church’s finances need to be structured over the next several years.

 

2. What is the timeline for developing a church budget?

There are several elements to the process and each one has its own timeline. Some churches use all these elements and some use only a few. Determine what works best in your specific church’s culture.

Theme development

  • Churches that use a theme typically have a team working on this 7-8 months before the beginning of the new fiscal year.
  • Some churches have themes centered on the core aspects of church (worship, fellowship, missions, member care, and education) and promote each one every five years. This helps guide theme development.
  • The committee usually selects a verse, logo, tag line, and music which will help focus the church during the budget emphasis. Churches with a fiscal calendar year often use October as the budget emphasis time, and theme development is in April and May.

Committee budget work

  • Committees need 2-3 months to find times to meet and come up with goals (numeric and intangible) for their ministry areas for the few years.
  • Committees should have a leader (staff or lay member) who can make a presentation, if necessary, to the Budget Team.
  • Committee work is done 4-6 months before the new fiscal year.

Budget Committee coordination

  • It is up to the Budget Committee (sometimes a subset of the Finance Committee) to gather the info from the various working committees and compile it into a comprehensive budget.
  • Some Budget Committees want representatives from the various teams to make presentations to the Budget Committee so that they’ll more fully understand the why behind each of the numbers. These presentations can help this Budget Committee to be the most fully informed group of lay leaders about the wide variety of work being done by the church.
  • Budget Committee work is done 3-4 months before the new fiscal year.

Church-wide presentations and vote

  • Some churches have a month-long budget or stewardship emphasis to help people understand what makes up all these figures and why each person in the church is important to make all of it happen. Many churches will use every form of communication possible to inform members and get them involved.
  • If the church is on the fiscal calendar year, then these presentations are in October with a vote by mid-November (before Thanksgiving) so as not  to encroach on Advent.
  • Typically, this work is done 2-3 months before the new fiscal year.

Follow up

This is a continuous process during the fiscal year. People need to be reminded of how their money is being used and the good that it is doing. Take advantage of Sunday morning offering times to tell the stories of how lives are being changed due to the generosity of church donors.

 

3. Who needs to be involved in the process?

Early stages

  • In the early development of a budget, you need the informed leadership working on the budget. This usually means the informed leadership in each budget area meets to plan their goals and determine the resources they need to achieve those plans.
  • The Budget Committee (or designated sub-committee of the Finance Committee) does not have jurisdiction over the goals in the various ministry areas because they are not as fully informed about those areas as the respective committees are.

Middle stages

  • At some point in the development process, the many ministry committees should invite feedback from the people invested in each area.
  • For example, the Missions Committee should tell people interested in missions what the plans are and then ask them for their ideas about what is needed on future endeavors. Committees must never create budgets in a vacuum – seek input first from the leadership and then from the followship. The “wisdom of the crowds” is valid and insightful.

Later stages

Finally, the different components of the budget will become public and that is when as many people as possible should be aware of the budget (at a minimum) and invested in it. The more people that are “buying into” the budget and what it wants to do, the more successful all the areas of the budget will be.

 

4. Should you use pledge cards?

Some churches have used pledge cards for decades and will continue to use them. Some churches stopped using them; some of those members regret that decision and others do not.

Pledge cards have several purposes:

  • As a tool in setting the budget
  • As a way to challenge people to give more
  • To track how much people have given

Increasingly, younger generations do not want to commit to a figure they’ll give. They will give – and give generously – but they just don’t want to state how much they’ll give. There are so many variables in life (debts for school, home, car, credit card; kids; trips; business and home; etc.) that are hard to plan for.

If you use pledge cards, then have a clear, concise, consistent reason WHY you are using them.

  • Pledge cards should never be used as a tool to bully people into committing or giving – too often that is what pledge cards devolve to.
  • Like ALL aspects of church finances, pledge cards must be used in a positive way, such as encouraging people to be more generous (with their prayers, their time given to church activities, and their finances).

 

5. How do you estimate your annual income?

This is one of the hardest numbers to determine in financial budgeting.

Fiscal prudence suggests one or a combination of the following. A church should be able to do better in the future than it has in the past.

  • Use the past 12 months’ rolling figure of actual receipts
  • Use 90% of the past 12 months’ rolling figure of actual receipts
  • Use a spreadsheet formula to forecast the next 12 months’ income

These formulas are intentionally conservative. The church can use any “excess” for capital needs, additional staffing or programming needs, and/or to establish and replenish reserves.
Be financially conservative in your projections. You won’t regret it.

 

Filed Under: budget, church administration, church finances, church financial statements, leadership, wisdom Tagged: , , , , ,

Fiscal Year

Posted on October 1, 2013 Written by

What should be a church’s fiscal year: The calendar year or some other 12-month time period? There isn’t a right or wrong answer; just find an answer that works best in your context. Second, there are pros and cons to having a calendar-year or non-calendar-year fiscal year. For instance, churches receive as much as 5% of their annual receipts in the last 10 days of the year, and it is impossible to spend that money before December 31. That leads to the question: should a church’s fiscal year end on 12/31 when it can’t use all the funds given to it, or should it use a different fiscal year?

Some denominations, such as the Nazarenes, require a different fiscal year; all Nazarene churches have a fiscal year which ends on April 30. Southern Baptist churches historically start on October 1 and end on September 30, but it is not mandated. Below is a list which was initiated by Brandon Woodard, a colleague and friend of mine.

Reasons not to use a calendar year as a fiscal year

  • Church won’t have to rely on December’s offering to meet their annual budget receipts or not
  • Allows the church to spend the December gifts in the subsequent calendar year because it is part of the December fiscal year
  • Spreads out the workload of calendar year-end closing of inputting a new budget; sending out donor gift statements, W-2s, W-3, 1099s, 1096; updating payroll increases, benefit premium changes; opening and closing fiscal years on the General Ledger; and all other year end closing procedures in a 30 day period (December 15-January 15)

Reasons to use a calendar year as a fiscal year

  • Most church members presume their church is on a calendar year
  • Many churches will receive more money in the last few days of the year than they can spend and these “unspent budget funds” can be set aside in the next fiscal year and used to fund reserves, pay for capital needs, knock down debt, or any number of other things that the church didn’t budget or plan for
  • It provides the opportunity to encourage people to be generous at Christmas and to help the church out even more

Personally, I prefer a calendar year as the fiscal year. It requires the church to be fiscally prudent throughout the year and then it can provide some monies for major needs. Also, many if not most businesses (including the IRS) use a calendar year, so society has trained people to use it.

Lead On!

Steve

 

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

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: , ,

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: , , ,

Total Income or Total Return Investing for Church Endowments

Posted on March 12, 2013 Written by

There are two major philosophies when it comes to how funds should be invested for the long-term benefit of the organizations holding the assets.

The Total Return Method

  • Modern portfolio management states that a return of 8% per year is something that should be expected.
  • Return is defined as total appreciation of the investment portfolio: this includes realized and unrealized gains/losses, interest, income, and dividends
  • US inflation has averaged 3% per year since 1928
  • A fund should always “plow back” at least 3% of its total appreciation per year into the total investment portfolio
  • That leaves, on average, 5% of the total appreciation which can and should be expended each year for the benefit of the organization for which the portfolio was created
  • The legal courts have ruled that foundations and endowments should spend 4-6% per year of their total investment portfolio on the purposes for which the donors gave the money
  • Distributing 4-6% and retaining 3% means the investment portfolio will always have the original purchasing power at the time of the gift
  • It also means that the investment portfolio will be invested in ways to achieve maximum

 The Total Income Method

  • For several hundred years, investment managers invested solely in income-producing financial instruments
  • Each year, the organizations “harvested” all or most of the investment income
  • Investing for total income results in a very different financial portfolio than investing for total growth
  • Inflation was not taken into consideration when investing for income
  • Over time, the portfolios invested in income-producing financial instruments were eroded by inflation and the organization used up the corpus to maintain its operations

Today, no major foundation or endowment uses Total Income; all have switched to Total Return. And, all use a 12 (or 16 or rarely a 20) quarter trailing average. That means they look at the past twelve quarters (3 years) and take the average of those quarters and then multiply that average by the 4-6% to be distributed. Looking back over 3, 4, or even 5 years flattens out many roller coaster curves of investments. Most foundation board decide each year what the distribution rate will be but it is almost always between 4 and 6% (e.g., sometimes 4.5%, sometimes 5.8%, etc.) depending on the financial investment returns for the prior year.

I could go on for about two more hours, but I won’t.

Lead On!

Steve

 

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