Monthly Financial Statements

My “Intro to Accounting” professor taught me some basic concepts which have guided me ever since. They are simple principles but vitally important to any and every organization.

 

  1. Always release a complete balance sheet and revenue & expense statement
    • These are the two basic financial statements. At a minimum these should always be released. There are a multitude of other financial reports but these are the minimums. These statements measure different things:
      • A balance sheet is a financial picture of the organization at a specific date. It shows all cash, debts, and restricted funds of a church.
      • A revenue & expense statement is shows how the organization is doing this fiscal year. It should have columns for the total annual budget; the monthly actual & budget figures; and the year-to-date actual & budget figures. Collectively these numbers indicate your current year’s financial status
  1. Never hide or not-release financial figures, even if they will elicit lots of questions
    • Never, ever, NEVER hide anything, period (.).
    • All numbers will come out. You need to be in control of bad AND good news. Hiding numbers only makes you look like you’re hiding things. That will always hurt you.
    • The numbers may look bad but the numbers are not about you but about the organization. Sharing everything allows you to keep your integrity. If the finance office has lost its integrity, it needs new staff.
  2. Release the data by the 15th of the subsequent month. To delay longer than that is to release “stale-data.”
    • There is no reason to delay releasing monthly financial data. Bank statements are available online so the bank reconciliation can even be done on the 1st of each month. There are going to be journal entries and maybe some backdated checks, but frankly, the financial office should be so update that closing each month is fast and routine.
    • Releasing financial data 30 days or later communicates that the finance office does not know what it is doing and/or that things in the financial area are unnecessarily complicated and needs help.

 

The bottom line, release financial data accurately and timely.

 

Lead On!

Steve

Designated Funds and UPMIFA (part 2)

Every church I’ve worked with has designated funds which are dormant. The long-standing rule of thumb was that to re-purpose the money in these funds was that each donor needed to be contacted to request permission to alter the use of their gifts. That is a good rule to use but in many cases, this is not practical or even possible. Fortunately, there is a legal alternative.  It is called UPMIFA: Uniform Prudent Management of Institutional Funds Act.

 

UPMIFA has been passed by almost every state legislature (there are a couple of holdouts) and it is virtually the same in each state. Look at your state’s legal code for the specific language – I’ll use the one from Virginia (where I live) for this post. In all instances the church must consult with a court or the attorney general. If the request is reasonable, they courts will agree to the church’s desires.

 

Below is the actual law from the Code of Virginia. Here are the salient points:

  1. Donors can change the purpose of their gift but it still must be used for a charitable purpose
  2. Judges and Attorneys General can change the purpose of a fund but it still must be used for a charitable purpose
  3. An institution can change the purpose of a fund by working with the Attorney General if the fund is less than $250,000
  4. An institution can change the purpose of a fund by notifying the Attorney General if the fund is less than $50,000, is over 20 years old, and it will be used for a similar purpose

 

  • 55-268.16. Release or modification of restrictions on management, investment, or purpose.
  1. If the donor consents in a record, an institution may release or modify, in whole or in part, a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund. A release or modification may not allow a fund to be used for a purpose other than a charitable purpose of the institution.
  2. The court, upon application of an institution, may modify a restriction contained in a gift instrument regarding the management or investment of an institutional fund if the restriction has become impracticable or wasteful, if it impairs the management or investment of the fund, or if, because of circumstances not anticipated by the donor, a modification of a restriction will further the purposes of the fund. The institution shall notify the Attorney General of the application, and the Attorney General shall be given an opportunity to be heard. To the extent practicable, any modification shall be made in accordance with the donor’s probable intention.
  3. If a particular charitable purpose or restriction contained in a gift instrument on the use of an institutional fund becomes unlawful, impracticable, impossible to achieve, or wasteful, the court, upon application of an institution, may modify the purpose of the fund or the restriction on the use of the fund in a manner consistent with the charitable purposes expressed in the gift instrument. The institution shall notify the Attorney General of the application, and the Attorney General shall be given an opportunity to be heard.
  4. If an institution determines that a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund is unlawful, impracticable, impossible to achieve, or wasteful, the institution, without application to the court but with the consent of the Attorney General, may modify the purpose of the fund or the restriction on the use of the fund in a manner consistent with the charitable purposes expressed in the gift instrument if the fund subject to the restriction has a total value of less than $250,000.
  5. If an institution determines that a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund is unlawful, impracticable, impossible to achieve, or wasteful, the institution, 60 days after notification to the Attorney General, may release or modify the restriction, in whole or part, if:
    1. The institutional fund subject to the restriction has a total value of less than $50,000;
    2. More than 20 years have elapsed since the fund was established; and
    3. The institution uses the property in a manner consistent with the charitable purposes expressed in the gift instrument.

 

Lead On!

Steve

Designated Funds and UPMIFA (part 1)

Churches are the beneficiaries of designated gifts – people who give to specific causes that touch their heart. This can be scholarships for students to go on mission trips or to college, to pay for children’s supplies and events, and scores of other ministries. Used wisely, designated funds can enhance a church’s mission by adding extra dollars to a church’s budget.

 

Every designated fund must have a specific purpose (why it was established and what it is to be used for) and a sunset clause (a determination of when the fund will cease to exist). However, many churches have funds that don’t have either a purpose or a timeline.

 

I challenge each church to go through all of it designated funds and write down its purpose and when it will cease to exist. The good news is that most church accounting software has a section in the chart of accounts where a memo can be written about each fund. Use that memo tab to write in this info so that this knowledge can be passed from one person to another and not lost.

 

Then, use you designated funds to supplement your budget needs. Use them as much as you can and encourage people to give to them – over and above what they give to the church’s operating budget.

 

However, even doing all that, churches are going to have funds whose purpose ceased to exist long ago. There is legal help for that and I’ll describe it in the next post.

 

Lead On!

Steve

Chart of Accounts (part 4 of 4)

Large churches can have a complicated accounting structure but I strongly recommend a simple one. Fortunately all good accounting software allows for flexibility. The greatest area which needs flexibility is in expenses. For instance, some churches have large children’s departments with budgets for the different age levels (preschool and children) or even further sub-groupings (infant, preschool, early elementary, elementary, and middle school, and high school).

 

Some churches have even further needs for classification because they are multisite churches. For instance, they may want to track expenses across campuses for each classification (how much did we spend on craft supplies for our children across all campuses?) but also expenses within a campus (how much did we spend all the preschool program at campus X?).

 

This can be accomplished by adding a three digit department number at the front of the five digit accounting number. The accounting department can do an inquiry to get the financial info requested for each campus and/or budget line. Multisite accounting can be as simple as assigning a department number to a campus so that inquiries are made easier.

 

The critical path is to assign account and department/multisite numbers in a logical pattern which later makes it easy to retrieve data. If there isn’t a good pattern, then getting information will be difficult and that works against what you’re trying to accomplish: getting financial data to help you make better financial decisions.

 

Lead On!

Steve

Chart of Accounts (part 3 of 4)

A chart of accounts must start with the end in mind. The end is always the reports that you want to generate and use for decision-making. What data do you need and how should that info be presented? That determines the format of the chart of accounts. For example, all information about age-level expenses in a church should be in the same area of the CoA and not spread out everywhere; in fact, all the children’s and youth expenses should be grouped together and then sub-totaled which then totaled with other age-level expenses let the reader know how much was spent in that category.

 

The numbering system in a CoA is very logical. I recommend that accounts have no more than five (5) numbers but I’ve seen some as short as three numbers and as long as 16 digits. Five is a happy medium!

 

Here is the basic accounting numbering system which is used pretty much everywhere in the US (where AICPA controls the accounting system).

1XXXX – Cash

2XXXX – Payables, Restricted or Designated Funds

3XXXX – Retained Equity or Net Assets

4XXXX – Revenue & Receipts

5XXXX – Usually reserved for revenues related to special projects

6XXXX – Expenses

7XXXX – Expenses

8XXXX – Expenses

9XXXX – Usually reserved for expenses related to special projects

 

The first digit is the accounting classification. The rest of the digits can be used for sub-categories and other classifications. For instance:

61XXX Missions

65XXX Worship

68XXX Care & Fellowship

70XXX Discipleship-General

71XXX Preschool

72XXX Children

73XXX Youth

74XXX College

75XXX Young Families

76XXX Median Adults

78XXX Senior Adults

81XXX Office & Administration

85XXX Building & Grounds

88XXX Personnel

 

Finally, when the system is set up, the last digit is usually zero (0) so that additional lines can be added over time as needed without having to renumber the entire CoA.

 

Be familiar with the standard accounting numbering system so that when you see an account number, you’ll have an idea of what its accounting classification is. It will help you when you meet with the finance committee.

 

Larger churches have more complicated accounting structures. See part 3 for larger church department and multisite accounting.

 

Lead On!

Steve

Chart of Accounts (part 2 of 4)

In part one, I talked in generalities about financial statements. This post is description of each of the major areas.

 

Balance Sheet (no other name for this doc)

  • Assets
    • Cash on hand in bank and investment accounts
    • Petty cash
    • Sometimes it lists cash you’ll get within the next 12 months
  • Liabilities
    • Payables – usually payroll taxes and payroll deductions which will be sent to the proper recipient the next month. These should never sit for month than a month.
    • Debts – long and short term debts for mortgages and building loans. Each debt should be listed separately so you’ll know what it was for. This must be updated each month as you pay down your debt.
    • Temporarily restricted funds – these are typically restricted by purpose (what they are for). Usually these monies are spent within 12 months for a specific cause such as mission trips, children’s and worship events, etc. Sometimes funds are there for years but each one should have a “sunset clause.” (see my UPMIFA blog post regarding what to do with “old funds”)
    • Permanently restricted funds are restricted by time (how long they are set aside). Usually these are put into an endowment fund because they time and purpose is longer than 12 months.
  • Net Assets (also known as equity, retained equity, or owner’s equity)
    • This is the total cash balance of what the church has accrued since it was started. Often there are two figures for this: the current year-to-date earnings and the prior years’ earnings.

 

Profit & Loss Statement (also known as an Income Statement and Statement of Revenues & Expenses)

  • Revenues or Receipts
    • This section is the total income for the church. I strongly encourage that this section have only revenues from the main purposes of the church. Include in this category only tithes, offerings, and other undesignated budget gifts.
    • You can have a subsection for other receipts such as interest, building use receipts, etc. but this receipts are incidental revenues.
  • Expenses
    • These are budget expense lines grouped into categories with a similar purpose. Churches have several broad categories and the most common ones are:
      • Worship & Music
      • Care & Fellowship
      • Discipleship & Education
      • Missions & Outreach
      • Office Administration
      • Building & Grounds
      • Personnel

 

Lead On!

Steve

Chart of Accounts (part 1 of 4)

A chart of accounts (CoA) is the road map in accounting. It makes processing payments and receipts, creating reports, extracting information, and so many others things much easier. There are several well-established rules for creating a chart of accounts which have been codified by the AICPA (American Institute of Certified Professional Accountants). These patterns means that anyone pick up a financial statement from any company and pretty quickly get the information they’re looking for (presuming the data is in there to begin with). Look at your chart of accounts and see if it follows the rules listed in these blog posts.

 

Accounting uses different names for the same thing. It can be confusing but I’ll give you some of the variations. They’ve acquired these names over the years and in different industries but they mean the same thing.

 

Every CoA has several divisions. The most basic one is the Balance Sheet and the Income Statement. A balance sheet shows all the money an organization has (assets), all the debts it has (liabilities), and the difference between the two (retained equity).

 

You can create as many lines and categories in your financial statements as you need but not too many. Even the largest of churches do not have more than 300 (that includes bank accounts, designated funds, payables, revenue lines, and expense lines.

 

Get to know what each of these mean so that when you’re looking at a financial statement so you’ll know what the difference is between them and what their respective purposes are. Next post, the descriptions of these sections.

 

Lead On!

Steve

Church Business Meetings (part 2 of 3)

This the second part on church business meetings and how they should change. The reason for the change is so the members and guests see the church as dynamic, not as static and boring. I believe that business must be engaging and not merely a recitation of fact and figures. Business meetings should consist of stories of people and how the church is helping them. My first post focused on the membership report. This post will focus on the programming reports.

Reports: the church is about the business of helping people see how much God loves them. The most common way churches do this is through their programming and activities. But if you’re not involved in one of those areas, you probably don’t know what is going on. Why not use the church business meeting to share with the entire church all of the successes (and failures) of the past and the exciting things that are planned for the future?

When the church’s financial report is given, the treasurer interviews ministry leaders saying, “The church has given you X dollars; can you tell us how you’ve used that money?” Then, the ministry leader talks about what they did with the money using pictures, music, children and youth, other adults, and any resource he or she has. The treasurer presents financial information about each ministry area and uses that a lead-in to ask what is going on with that money.

By the end of the business meeting, attendees have seen and heard what their church is doing, who is involved, how much money has been spent and for what, and what is going to happen in the next few weeks and months. Everyone leaves the meetings having been informed about events outside their areas of interest.

At every meeting, the reports from the main ministry areas are a must: missions, age-level programming (adults, young adults, youth, and children), pastoral care, administration, fellowship, and worship (the five purposes of the church). Then, reports can be given by other ministry areas as there is need and time.

One caveat: all reports must be engaging and the treasurer/interviewer must be energetic in asking questions and encouraging the presenter to be enthusiastic. Reading dry reports should not be permitted; the church must be an exciting place to be and the reports must reflect that.

Next post: decision-making!

 

Lead On!

Steve