By Sarah Thompson
At my annual checkup, the doctor ordered a number of blood tests. I didn’t think much about it until a copy of the test results arrived in the mail.
The report had a lot of numbers listed under “in range,” “out of range” and “reference range” headings. I had many questions as I scanned the list, particularly about the numbers in the “out of range” column. What does that mean? Is one result more important than another? Does it matter if a number is out of the reference range by a little or a lot — or if it’s “high” or “low”?
There was a wealth of information at my fingertips, but none of it was useful to me because I didn’t understand the report as it was intended to be used. To me, it was just a scrap paper. To a knowledgeable user, it was a comprehensive picture of my overall health.
Asking the right questions
You might find yourself in a similar situation as you attempt to assess your church’s financial health. There’s a lot of information you could gather; but, unless you know the right questions to ask (and how to view the answers), you won’t gain a clear understanding of your church’s financial situation.
Space not permitting, we won’t go into the specific measures a church should track in this article. We will, however, provide insights into what types of questions you should be asking, and how you should analyze the answers.
Here are a few of the questions we always ask when looking at a church’s financial information:
- Are the resources being used effectively?
- Does the church have adequate cash reserves?
- Is the debt level appropriate?
- Are contributions reasonable?
- Are the expense ratios reasonable?
- How do the financial resources of the church compare with other churches?
- What are the most appropriate key financial performance indicators for the church?
- Does the church have adequate financial resources to accomplish its mission?
- Is the church accomplishing its strategic financial goals?
The answers to these questions offer insights into different facets of the church and how it’s using its financial resources. The resulting financial indicators will provide an assessment of your church’s overall financial health.
Gauging wellness
Just as a blood test helps the doctor know what to do to keep you in optimum health, a properly designed financial indicator can help a church administrator evaluate the financial wellness of a church, and also identify areas for improvement.
These are two ways to look at financial trends in your church. The first is with inward comparisons — comparing data from prior years to the current year. Inward comparisons allow your church to see how funds are received and spent over a set period. Reviewing and comparing this data across a number of years will help identify historical trends and any underlying changes within the church. This can help your church align its spending patterns with its mission and vision.
The second method is to compare your church with other churches of a similar size. Comparing your church against other churches with similar asset sizes can be misleading, because churches with older properties tend to have smaller property values due to depreciation. At the same time, comparing your church to churches with similar revenues might not be effective either, unless the makeup of the revenues is known.
For example, one church might rely solely on contributions, while another has significant sources of income from a school or other activities. Or, a church might be seeing unusually high contributions because of a capital campaign. That’s why we recommend that churches compare themselves against churches with a similar number of average weekend adult attendees, instead.
While the numbers these comparisons provide are important financial indicators, it’s also crucial to understand how these measurements fit within the range of peer churches against which your church is comparing itself. A measurement calculated by averaging data from just a few peer churches might produce a much different result than one calculated with data from many churches.
Finally, it’s important to benchmark your church against others in a similar region of the country. Operating costs in the Midwest, for example, can be very different from costs in New York or California. Using averages from peers with demographics similar to a church’s own can provide a more accurate and objective measure of financial health.
Next steps
Determining what information to track in your church’s indicators, and finding peers to benchmark against, can seem overwhelming and time-consuming. One suggestion is to network with peer churches in your area, and agree to share data. If your church is part of a church business administrators group (such as National Association of Church Business Administration, or NACBA), it could do comparisons with other members.
Additionally, specialized reports — such as compensation studies — are available. Your church can consider using tools such as the Church Financial Health Index™, which was designed to provide in-depth answers to several of the questions mentioned at the beginning of this article. To find out more, visit www.capincrouse.com/churchhealth.
Our hope is that your church begins to ask the right questions and use indicators that will give an accurate picture of its financial health. This insight can help your church function more efficiently and effectively to accomplish its ministry.
Sarah Thompson is audit manager at CapinCrouse LLP. She can be reached at sthompson@capincrouse.com.
