May - June 2016

Written by Dan Busby
From his column God, Government and Me—Money in the Church

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It’s the million-dollar question: How much cash and liquid marketable investment securities should a particular church have in reserve?

There is a broad span of possible responses. On one end, someone might say managing liquidity is a non-issue because “God will provide.” At the other end, a church might choose to stockpile reserves beyond reason. Neither approach is usually sound. Appropriate reserves allow a church to pay obligations on time and provide a good witness for our Lord.

There are five key cash reserve issues:

1. What should a church consider when thinking about providing reasonable cash reserves? A church must consider all cash inflows and outflows. If the inflows do not exceed the outflows, cash reserves are not being generated.

Here is one of my favorite cash budgeting myths: "We must always balance and stay within the cash budget." Staying within the cash budget is certainly preferable to operating outside the cash budget, but if cash inflows consistently equal cash outflows, cash reserves are not being depleted, but neither are they being built.

Here is the bottom line: The only way to create cash reserves is when cash inflows exceed cash outflows. I call it the “law of cash reserves.”

2. How should a church measure cash reserves? Cash reserves are often measured in terms of months of operating cash. In other words, if the operating (unrestricted) budget of a church is $1.2 million, one month’s budget is $100,000. If the church has cash, cash equivalents, and other liquid investments of $300,000 with none of this cash relating to restricted net assets, it has three months of operating cash. Caution: an amount equal to the total of unexpended restricted gifts should be subtracted from total cash reserves before calculating the number of months of cash available for operations.

When using the number of months of operating cash as a measuring stick, the best time to measure reserves at month-end when cash is generally at its lowest point for the year. If a church bases its cash reserves calculation on the highest cash point of the year—often December 31—a false sense of security could be conveyed.

How many months of operating cash should a church have? This is a key question for which there is no “one-size-fits-all” answer for churches.

3. Should a church have a cash reserve philosophy? Yes, this is the starting point.

The governing board of a church generally drives the cash reserve philosophy. This philosophy should answer the question of why the church should have cash reserves. Financial liquidity is one obvious reason. Others may include reserves for debt service, capital replacement, restricted gifts, and church planting (these are discussed later).

4. How does a church generate cash reserves? Planning is needed to generate cash reserves—the process generally takes several years to accomplish—and should be annually reviewed to determine the ongoing adequacy. Here are a few concepts churches use to build cash reserves: (a) project next year’s revenue lower than current year's expenses; (b) look for opportunities to reduce corresponding expense budgets to create cash reserves; (c) include a cash reserve line in the budget, and add legacy gifts to cash reserves.

5. Should a church adopt a cash reserve policy? A church should consider the following cash reserve policies: (a) restricted gift reserves—equal to the unexpended balance of restricted gifts; (b) debt service reserves—typically enough to cover several months of mortgage payments; (c) capital replacement reserves based on the life cycle of the HVAC equipment, church roof, and parking lot surfacing; and (d) church planting reserves.

In conclusion, creating and maintaining cash reserves is not as easy as it looks. It requires thoughtful planning and faithful administration. There may be pressure to pay down the mortgage early, pressure to increase the compensation of staff, pressure for a new program—options to creating and maintaining cash reserves cad always be found. The manner in which a church balances their cash liquidity opportunities will speak volumes about how a church demonstrates its financial stewardship.

Dan Busby is a certified public accountant and president of the Evangelical Council for Financial Accountability (ECFA).

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