A while ago I was reviewing the financial statements of a Christian ministry shortly before the end of the year and noticed that the expenditures for the year exceeded income by a significant amount. When I inquired about this situation, the leader quickly assured me that it was not a problem as we were just about to enter the holiday season and the shortfall would be made up with year-end giving. While this may have been true, I questioned the wisdom of routinely spending money before it is received under the assumption that it will somehow be covered in the future. There is a fine line between faith and presumption.
Fundamental to every organization is its annual operating cycle; generally a 12-month period also called its fiscal year. From a practical standpoint, it has little effect upon the programs or other activities of the organization. It is simply the 12-month period used for budgeting and financial reporting purposes. At first glance it would seem that choosing a fiscal year is a matter of little consequence, merely an IRS requirement; however, it can have an important effect upon the efficient operations of a church or other ministry
Most nonprofit organizations, particularly new ones just starting out, simply use the normal calendar year (Jan. 1 – Dec. 31) for their fiscal year. This coincides with the natural year and is very appropriate in most situations. In smaller churches where expenses are limited or income more predictable, a calendar year may make perfect sense. For other churches, particularly those with large budgets, a fiscal year other than the normal calendar year may be beneficial.
Natural operating cycle
Almost every organization has a natural operating cycle during which there are periods of both high levels of activity and lower levels of activity. A good example would be Christian schools. They generally gear up in July and August, go strong through the fall, winter and spring, and then slow down in June. Churches often follow a similar pattern with their busiest time being between September and the beginning of summer when most people take their vacations.
In such situations, a disadvantage of using the natural calendar year for the fiscal year is that the organization’s year-end falls right at its busiest time. Programs begun in the fall are not even half completed and still in process. In addition, people are busy with the holidays and it is certainly not the most convenient time to be closing the books, planning next year’s programs and preparing next year’s budget (ask any church bookkeeper or accountant). And, from a management perspective, the holidays are not the best time to be making important strategic decisions such as eliminating programs, laying off staff, or similar actions that often accompany a new budget year.
In the above situations, a June 30 year-end has the advantage of making the organizations’ fiscal year-end coincide more closely with the organizations’ natural operating cycle. It also allows for the preparation of next year’s budget and operating plan, closing of the books, undergoing the annual audit (if applicable), etc., to be done at a “slower” or more convenient time than in the middle of the organization’s peak activity period.
The giving pattern
Another important reason for choosing a fiscal year-end other than Dec. 31 is the giving pattern of many churches. In most churches, December is the largest giving month of the year and studies have shown that as much as 40 percent of a church’s annual income often comes in during the last three months of the year. This can leave the church very vulnerable if the total expected income is not received and it ends the year with a large deficit. While larger churches may have bank lines of credit to deal with such situations, smaller churches may not.
In the case of a July 1 to June 30 fiscal year, the largest giving months are generally near the middle of the year (Nov. and Dec.), and if the income at that time is less than anticipated the organization still has six months left to either reduce spending or raise addition income.
No year-end will be appropriate for every church or ministry. The key is choosing a year-end that coincides with the natural operating cycle of the church. This helps in both the planning and cash management processes as well as places most of the year-end work of the organization at a time when it is less likely to interfere with other activities. The important thing is not what date you use, but that it’s during a time that best meets your needs and contributes to the efficient and effective management of the organization.
Jim Canning, Burbank, CA, is a CPA and audits and consults for Christian organizations, and has been chief financial officer of World Vision International.