The economy is affecting a lot of people right now. How is it affecting your church? The answer to this question runs the gamut, for all sorts of reasons. Some are cutting expenses, while others are building new facilities. Some congregations are growing and some are shrinking. Individuals are giving more; others are giving less. One thing remains the same: The economic downturn has forced people to change the way they manage their finances.
The same is true for churches. They must look differently at how they handle their finances. In an economy characterized by rising prices, declining employment and instability in the financial services industry, those responsible for church finances are being reminded of the importance of sound cash management.
This is especially true if your church is growing and looking to expand. The number of lenders serving churches is decreasing and those that are offering financing are likely to be particularly attentive to financial stability when churches come to them for loans. Regardless of how the economy is affecting your church, now is an important time to ensure a solid financial foundation. A good starting point is to get a good handle on liquidity.
Don’t overlook liquidity management
Liquidity management is the practice of managing finances in order to meet your church’s financial obligations and accomplish your mission. Careful liquidity management is often overlooked due to a false sense of security. What appear to be large reserve balances can lead church leaders to believe they have sufficient cash, forgetting that unexpected expenses or drops in giving can quickly deplete those balances. Experts suggest that maintaining adequate liquidity is the chief financial objective for any ministry.
Whatever is happening in the economy, cash flows seldom equal expenses. For example, giving typically dips during the summer, when expenses are often the highest. Fluctuations in cash flow often hit without warning.
Fortunately, you can prepare for the unexpected. The first step is to assess your church’s economic environment. How are the current economic realities affecting the people in your congregation and community? Think about the people who financially support your church and answer questions like:
• How are the economic conditions affecting them?
• Are they losing their jobs or facing layoffs? Salary freezes?
• Do they rely heavily on investment income or home equity?
You should also compare historical giving patterns to current ones. How have your members responded during past downturns? Even if your giving is on the rise, could present trends slow or stop that growth?
Cash flow forecast
An economic assessment equips you to do a cash flow forecast, which can spare you from having to make rash decisions down the road, like cutting staff, because of cash flow issues you could have anticipated and avoided by acting now.
When it comes to cash flow, day-to-day income and expenses are sometimes unpredictable. However, by determining transaction, precautionary and speculative requirements, you can forecast liquidity needs.
Transaction requirements are the funds needed for planned expenses like payroll and utilities. Start by identifying expected expenses for a specific period of time. When preparing a cash flow forecast, experts recommend examining changes or anticipated changes to the budget and determining realistic income and expenses. Compare your forecast to actual cash reserves to ensure that adequate funds are available for transactional expenses.
Precautionary requirements are cash reserves needed to pay for unplanned expenses. Anticipate events that could impact income or expenses, then calculate appropriate reserves if such events were to occur. Also identify the life span for capital items (such as HVAC systems, roofs or carpet) and reserve funds to replace them when necessary.
Learn from others
Speculative requirements are funds needed to pursue unplanned occurrences, such as natural disasters like hurricanes, or hiring a key staff member who unexpectedly becomes available. Transaction, precautionary and speculative requirements are usually based on your ministry’s history, but it is also good to interview other ministries and financial experts and learn from their experiences
Once you have calculated the funds needed to meet your transaction, precautionary and speculative requirements, develop a plan to build adequate reserves. You could set aside the entire reserve amount as cash, but there are several reasons this approach may not make sense. You may not have that much cash or you may have some great ministry needs or ideas that those funds could be used for.
Another approach is to build reserves using a combination of cash and a line of credit (LOC) with a financial institution. Picture a bucket that, when full, contains adequate reserves for your ministry. If half of the reserves in that bucket are actual ministry funds, invested wisely, the other half can be the LOC, which is only drawn upon as needed.
This approach minimizes anxiety, ministry goes uninterrupted and your cash management is characterized by good stewardship. For those who struggle with the notion of indebtedness, most LOCs have an “evergreen” clause that requires them to be paid in full at least once every 12 months.
Whatever you determine to be adequate reserves, you probably will not have enough cash at the outset to meet that level. So part of your plan should be to determine appropriate steps to get there. As you build reserves, you may find a line of credit to be a helpful tool for meeting immediate cash needs.
Shoring up your liquidity management will position you for a more favorable reception when it is time to talk with lenders about expanding your facilities. They will carefully scrutinize not only your cash management practices, but will look at your entire financial picture. So you will also want to be prepared to provide the following.
Have financial statements ready
You will need to be prepared to provide financial statements, including income statements, balance sheets and cash flow for the existing year plus the past two to three years. Also important is a recap of dollars invested in the project to date if you have already begun construction.
Make sure that budgets (actual for two years prior and a new projected budget that reflects the impact of the loan for future years) are available and that you are keeping track of a payment schedule of any existing loans including the current interest rate and the maturity date and a schedule of how the loan funds and cash will be allocated to the project. Another essential component is to have a cash flow forecast for the next year.
Finally, when working to strengthen your church’s financial foundation, it is important to find a financial partner who understands ministry in general and, better yet, your church in particular. Especially in today’s economy, having someone to act as a sounding board and review your finances can make the difference between being forced to make those rash decisions about cutting expenses or finding that you actually have more funds available for ministry today and tomorrow.
Mark Jones is a vice president and senior banking consultant with Evangelical Christian Credit Union, Brea, CA. [eccu.org]