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: , , , , ,

Tips for Working with Grant-Making Foundations

Posted on February 12, 2013 Written by
  • They don’t want to support salaries of employees or operations; they want to give money for programming. Their true goal is to help with the programming – the part of a non-profit that is making a difference in the people it serves. One way to accomplish both is to prove how a person is so connected to a specific program that there is a symbiotic and synergistic relationship.
  • They give money to organizations that are working and collaborating with other orgs to accomplish the purpose. Grant-makers don’t like to have multiple non-profits all trying to do the same thing but who won’t work with each other. They feel that is not a wise use of resources.
  • They like organizations that have broad support from donors, not a narrow group. Mkae sure that you are tapping the widest possible group of potential contributors.
  • They are made up of people, of very caring people who want to do the most good with the resources they have. They all have restraints but I can tell you from personal experience all grant-makers want to give away far more than they are permitted to give.
  • Appeal to the generosity and humanity of the grant-makers. Get to know them as people and make sure they know you, not just your mission. Don’t be just a report they read, be a person and a face they relate to.
  • Ask them who else you can talk to. Not only do grant-makers know the local non-profits, they are usually well acquainted with many high-capacity donors. These donors may have additional financial resources they’d like to give away but do not know of a worthy opportunity. The grant-makers know the passions of these high-net-worth individuals and they might be willing to serve as a conduit for you to access these generous people.

Lead On!
Steve

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

Financial Records Retention for Churches

Posted on October 26, 2012 Written by

Records retention of financial data can get very complicated very quickly but I think it should be simple. I’ve studied different charts but it all can be divided into two categories: 7 years and permanent.

7 Years

  • Bank statements & reconciliations
  • Contribution records
  • Accounts payable records
  • Payroll detail
  • And other financial detail records
 Permanently
  • Commercial insurance records and payments (property and workers’ comp)
  • W-2s, W-3s, 1099s, and 1096s
  • General Ledger detail
  • Monthly financial statements
  • And other big picture records
The short-term docs are kept mostly in case of a church or staff member being audited by the IRS; IRS audits can go back only 7 years maximum. Also, after 7 years, most financial info is considered “historical” and not relevant to the church’s current status.

 

The reason for keeping insurance docs forever is for legal purposes: if something comes up years later (child molestation or a building issue), you want to get the insurance company at the time of the incident to pay for and handle all the legal issues You need to keep a copy of the policy and payment of the bill to prove it was in effect. Other long-term docs are kept for legal and financial history; they are rarely consulted but it is a good way to keep financial history. There is no legal or financial reason to keep records of individual gifts beyond 7 years.
BTW, there is no permanent or long-term accepted standard for record-keeping. Right now the best way is on paper with an electronic backup in PDF format. Everyone is waiting on the Library of Congress to determine the definitive long-term storage but LoC is waiting on technology (which changes constantly). Until then, print things out (old-school) and have an electronic version (new school).
These docs need to be stored
  • In a climate controlled environment such as a closet
  • Above floor level  so that rising water won’t damage them
  • Behind a secure door which is keyed differently than all other building keys
  • In boxes on shelves to make access in subsequent years easier
  • Together by fiscal year and all permanent records need to be stored together
  • And, the financial records storage closet can also be used to store items that just don’t fit in the finance office.

Each year, the oldest docs need to be shredded. I took the annual shredding chore and made it into an opportunity to help church members. I announced, especially to the senior adults, the day that shredding would happen and encouraged them to bring in old docs such as tax records and bank statements. The seniors were very grateful that the shredding could be done at no cost to them and it didn’t cost the church any extra either.

Shredding will cost less than $100 or you can see if your bank will shred your docs for you. Some businesses have “shredding parties” to draw new customers – take advantage of that even if you don’t become one of their customers.

Lead On!

Steve

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

Electronic Donations

Posted on July 31, 2012 Written by

Making donations or gifts without using checks or cash is increasingly routine and within a few years will become the norm for many churches (but not all – some churches will fight this tooth and nail). There are a lot of ways to give electronically – let me list a few:

  • Bank Drafts
    • Bank drafts have been around for a couple of decades or more. This is where you authorize your bank to send money to the bank account of an organization (either at your bank or even another bank). It is easy to do but the donor has little control over the situation and gets reports only from the bank statement or from the organization sending the donor a contribution statement. This system is okay, but antiquated.
    • I work with a church that has been using this system for many years. Each month, almost 10% of their budget comes in this way. The fees are very low and the church gets most of the money, too.
  • Online Giving
    • In the past 10-15 years online giving has become quite the rage – as it should be. Younger generations don’t carry cash or even plastic – they “keep” their money in their phones or other electronic devices. They want to be able to go to a website where they can readily and easily give money to the organization they wish to support. This is a very good way to support your church and every church should have an electronic giving portal.
    • Credit card fees range from 2.30% to as high as 5% of the total gift and debit cards are typically much less. These fees should be considered part of the “cost of doing business.” In general, the easier it is for people to donate, the more people and the more donations will be received which will offset the fees. http://www.serviceu.com/ or http://www.e-giving.org/ are good companies that know churches and can provide solutions.
  • Giving Kiosk
    • About 10 years ago the idea was born of a computer station in the lobby of the church where people could give by either swiping a credit card or going to a website to give money. This is very neat – Stu Baker with http://www.securegive.com/ can show anyone their product which was developed by his father, a pastor in Georgia.
    • This kiosk provides great flexibility to the donor who can set up a one-time or recurring gift (just like in online giving), but it also gives the donor the option to swipe a credit or debit card by which means that personal data is transferred to the account and that makes it even easier for the donor. I very much like the idea of giving kiosks.
    • A colleague of mine even dreamed up a “kiosk-lite” by finding an old computer and monitor, connecting them to the internet and programming the PC so that it would only stay on their churches E-giving website and never go anywhere else.
  • Texting Service
    • After natural disasters like the earthquake in Haiti in 2011, several organizations advertised where people could text money. This is a very simple method for people to donate money to their favorite cause – the problem is that most of the organizations that coordinate these apps have amounts of $5 and $10 – nothing more. I’d like for there to be an “unlimited” category where people put in their own amounts. I read in June 2012 where they are exploring increasing the amount that can be given to $20 (this is negotiated with the cell phone companies).
    • This is very convenient but it limits how generous people can be. If I want to give $100, I don’t want to tap my phone 10 times (at $10 per time) to give money. I very much like this concept, I just want it to be less restrictive.
  • QR Code
    • A QR code is that square made up of hundreds of very small black and white squares. QR codes are free. What they do is to activate the web browser on a portable device (phone, tablet, etc.). Every QR code is linked to a specific website. Linking your QR code to your churches giving website allows people to navigate to that site immediately.
    • A friend of mine created the QR code for his church and now places the QR image in every Sunday bulletin. As the offering is passed, people can pull out their smartphones, scan the code, and give as much as they want.
    • This is ultimate flexibility – it puts the donor in total control of when, where, how much, and to what he or she is giving. People can take the document with the QR code and use it later or save the destination of the QR code for later referral.

Additional benefits to electronic giving:

  • There is the well-documented fact that online giving is pretty much impervious to Sundays where the church is closed due to weather (snow, hurricanes, etc.) and tithing declines due to vacations and holidays. The internet is never closed due to weather and it never takes a vacation or is sick.
  • What is less well-known is how much online giving will make it easier for people (guests and regular attendees) who want to give who don’t have cash or a check with them that Sunday. If they could, they would give – but they left their money at home. No one leaves home without their smartphone!
  • An insurance agent told me the church’s premium will decrease because of the reduced exposure since there is less cash on hand (fewer dollars that could be stolen). That is a good but hidden benefit!
  • Online giving is becoming the norm – society is teaching people how to buy things online and make them feel comfortable with it. Since the marketplace is already doing the education to/for church members, churches can piggyback on this and leverage this knowledge for the church’s benefit through its online giving.
  • Donors can keep track of their contributions themselves. People can see what they’ve given to and what they haven’t supported (yet). This will help the church’s Finance Office by having donors more informed and even be able to print out their own statements of contribution as they need.
  • It also makes it easy for the church to send an email to everyone who has donated online which can result in increased communication between the church and members, especially donors.
  • Also, it might help the Finance Office. Some online giving sites interface with church financial software so that online gifts can be imported directly to the member’s database. That will update the financial portion of a member’s record and help the church keep track of all contributions by that person.

There are lots of ways to leverage online giving. Wise churches will be looking at ways to maximize the number of ways to receive gifts and to make it easier for donors to give. If you make it hard, then you’ll be on hard times. Make it easy for people to give – use the KISS principle: “Keep It Simple, Stupid!”

Lead On!
Steve

Filed Under: church finances, church financial statements, generosity, young adults Tagged: , , ,

1Q2012 Statement of Contribution

Posted on March 22, 2012 Written by

One quarter of 2012 is almost over so you need to prepare now to send out your first quarterly contribution statement of the year. Some churches send out statements only once a year – let me encourage you to send out statements each quarter plus one more:

  • 1Q2012 – send out in the first 10 days of April
  • 2Q2012 – send out in the first 10 days of July
  • 3Q2012 – send out in the first 10 days of October
  • 4Q2012 – send out the yearly statement by January 31

PLUS

  • Send out a statement for the first eleven months (January through November) in the first 10 days of December. Why? So that people can see what they’ve given or not given so far in the year.

But let’s get back to 1Q2012!

Sending a statement out in early April makes sense for several reasons:

  • Use this opportunity to send a letter with the statement of contributions explaining to people what their money has been used for. They want to know what the church did with it – so tell them all the good things you’ve been doing and are planning to do. Share with them a couple of compelling stories – that will make all the difference in the world to some readers.
  • At this time of year (tax-filing season in the US), people’s awareness of how much they’ve given or not (and thus able to deduct from their tax return) is heightened. Since many people have just completed their annual tax forms, they’re making promises to themselves to give more away to charity so they can give less to the government. Sending a letter in early April gives them a great reminder to give a check to their church.
  • Easter is typically in early April. Most Christians will come to church on Easter and they’ll usually hear a sermon about God’s gift to us through Christ. They will hear about giving and sacrifice – this letter is a way to encourage them to tangibly respond with their own gifts.
  • Gentle reminders throughout the year of how much people give to their church are good for both the church and the donor. These reminders are not heavy-hitting or guilt-inducing. These letters are simply nudges in reminding people to be financially faithful to their church – and you’re sending these letters to the people who have already “bought in” to the vision of the church, they’re already giving!

So, here’s your homework for this weekend: find two great stories about what has happened in your church these past three months (since Christmas), put them in a letter, and send the letter with the quarterly statement of contributions.

Oh, one very important fact: send your letters with first class postage. Yes, that is a lot more expensive than bulk mail. But realize that the “open rate” (as opposed the “throw in the trash can rate”) of first class stamped envelopes to bulk mail envelopes is something like five to one (don’t quote me on that ratio, but it is way up there). People will open an envelope with first class postage far more often – and you want people to open envelopes to read the letter and the statement of contributions. Okay, back to your homework.

Lead On!
Steve

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

New Year’s Letter

Posted on January 1, 2012 Written by

I’ve got a job for the leader of your faith community: write a letter to your congregation about your dreams for 2012. Technically it is not a “New Year’s Resolution” letter but it is a letter about your hopes and vision for the church for the new year. Call it a “New Year Vision Letter.”

What should be in this letter? Well, it should be no more than one page – please don’t get long-winded or else people will stop reading after about two paragraphs (if you’re lucky). Use a 12 point font to make the letter easier to read – don’t cheat by using 8 point font to cram in more words! Make the letter no more than five paragraphs long using the following template:

  1. Intro Paragraph – Write about 2011 and where the congregation has come in the past 12 months and even the years before then. Be brief, be very brief in this synopsis – this is NOT the purpose of your letter; this is just a starting point so that everyone is on the same page.
  2. Next Two or Three Paragraphs – give three concrete (lots of details) ideas of what you want to accomplish in 2012. Flesh out each idea in one paragraph with financial costs, numbers of volunteers needed, dates by which the goals need to be met, and the promise of a party when each goal is reached. (I believe the church doesn’t party enough – we need to celebrate accomplishments more often but that requires knowing where the finish line is in each goal.)
  3. Final Paragraph – a prayer of blessing on each reader and an acknowledgement of the generosity by the family of faith which has permitted the church to do all is has done so far. Being sincerely thankful is very important.

This letter should go out to every person in the church because it will help set the tone for the church in 2012. A good way to send out the letter is to include it in the 2011 statement of contributions which every church mails out to every member (at least to every donor) of the church. Every person will open that letter because they want to see how much they can write off on their taxes – when a letter from the pastor falls out, they’ll read that, too. Who knows, your letter may spark some dialogue with people – it can certainly be a conversation starter with your leadership. I know they want to know what your dreams are and how they can participate in making them happen – to benefit the church and the Kingdom.

Lead On!
Steve

Filed Under: church administration, church finances, church financial statements, communications, leadership, strategy Tagged: , , , , ,

Budget Percentages

Posted on September 12, 2011 Written by

Below is a recent email exchange with a friend of mine (names omitted).

 
Email Question:
I have a church that wants help examining their budget allocations by categories: missions, personnel, programs, etc. They want to look at similar size churches with similar size budgets. They want to know whether their allocations are in line for their type of church. Basically, they want to benchmark their distributions. They suspect that their personnel budget at 67% is high, but the church doesn’t know any different. And they want to know why they do not have any money to do actual programs.
 
Do you have access to any sort of database like that from any of your connections?
 
My response:
  1. No, I don’t know of any authoritative written source of ratios. Sorry.
  2. My experience tells me the following makes commons sense

 

a.      Personnel
                                                              i.      Range of 40-60% of undesignated receipts
                                                            ii.      Ideally about 50%
                                                          iii.      This includes the ministers and administrative assistants – people key to accomplishing the goals, mission and vision of the church
b.      Facilities
                                                              i.      Range of 15-25% of undesignated receipts
                                                            ii.      Ideally about 20%
                                                          iii.      This includes facilities staff costs
                                                          iv.      The percentage will be higher if a church has debt; lower if there is no or low debt.
                                                            v.      A church should spend annually about 2% of the cost of replacing the building on maintenance. If you have a building worth $1 million, then spend about $20,000 on maintenance. The rest of the percentage will be spent on salaries, utilities, cleaning supplies, commercial property insurance, capital reserve funds, etc.
c.      Programming
                                                              i.      Range of 20-35% of undesignated receipts
                                                            ii.      Ideally about 30%
                                                          iii.      This includes education, worship, missions, funds budgeted for allocation to outside organizations (Cooperative Program/Missions), etc.
That being said, these percentages go wild in various types of churches. New, emerging, highly growing churches have very high salary percentages and loads of debt. Older, established churches have paid off their debt so their programming is high and salaries have stabilized in the 50-60% range. While there is no “one size fits all” there are well-grounded rules that will help a church stay out of fiscal trouble. Hope this helps.
Lead On!
Steve
 
Filed Under: accounting, budget, church finances, church financial statements, leadership, strategy Tagged: , , , , ,
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