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Archive for the ‘audit’ Category

Reviewing Financial Reports

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Recently, I was asked, “What are some basic steps we can do to improve our financial management?”

I was visiting a local congregation and the leaders were in the process of reviewing their financial history, operations, and current accounting controls. In the meeting I listed off about five items, but in reflection, I thought I would create an official list of financial basics for nonprofit management.

Financial Basics for Nonprofit Management:

  • Tracking of Data- by tracking data, you can determine benchmarks for growth or decline. Be sure to track participation, income, expenses, donations (and levels of giving), and long term goals (and to communicate these to leaders, donors, and members).
  • Accounting Controls-many small nonprofits rely upon 1 or 2 people to handle all of their bookkeeping. This leaves them vulnerable to fraud and usually limits financial communications. Be sure to have monthly review of finances, independent reviews of bookkeeping, limits on spending, and requirements for approval of spending.
  • 6 Months of Emergency Savings- every organization should have 6 months of cash savings available to cover expenses in an emergency.
  • Line of Credit- as organizations grow, they can improve their cash flow by taking out a line of credit or operating loan. LOC should be capped at around 3 months of expenses, and often operate similar to a credit card for an organization.
  • Multiple Income Streams-no organization should only have one line of income. By creating multiple revenue streams, nonprofits increase their stability.
  • Endowment & Net Assets– Gone are the days when a nonprofit organization should operate at a net zero. By creating endowments and net assets, nonprofits can cover the cost of their operations, allowing more of their donations to immediately  go into outreach.
  • Facility Management– Buildings cost a lot to maintain and operate. If you own a facility, be sure keep up with facility maintenance, use it as resource, and improve it as building code and mission needs change- otherwise it can become black-hole that sucks money away from your mission focus.
  • Board Development- Board members are ultimately responsible for organizations- be sure board members understand their roles and that they are giving proper oversight of staff and operations.
  • Insurance- Be sure that your organization has enough insurance to cover its liabilities for its staff, operations, facilities, and to protect the organization from lawsuits and emergencies.
  • Management & Gift Policies-smaller nonprofits often lack staff, organizational management (by laws), and gift policies which help organize and outline how nonprofit organizations operate and how donations should be accepted and used.
  • Financial Relationships– this may seem like an odd item for this list, but knowing your bank manager, accountant, insurance broker, and financial advisers personally can be critical in emergencies and/or when you need additional help.

There are many other items that could be added to this list (brand management, communications, mission focus, etc), but these are some highlights to help you review how your church or nonprofit organization manages its financial operations.

 

 

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White Chapel

photo: edgeplot

Unlike most commercial businesses, which have a common standard by which to rate their financial operations and health, churches struggle to identify healthy financial norms.

Part of the reason for this struggle has to do with the following reasons:

  • Churches are faith based organizations
  • Church are contextual
  • Churches are organized by mixed polity (denomination or independent)
  • Churches are exempt from many IRS and government reporting requirements
  • Churches vary in size, financial support, and ministry
  • Churches don’t usually follow GAAP (General Accepted Accounting Principles)
  • Churches are run by volunteers

However, while all of these factors cause incongruity, there are a number of common ratios and principles that many churches share related to income, expense, debt, membership and worship attendance. I have highlighted a few of these in some of my earlier posts (please see: Financial Rules: Ministry Distribution), but another resource is a new financial database that was created by Capin and Crouse, CPA. (more…)

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Many churches rely on volunteers to keep their financial records, with mixed success.  I recently was working with a church for a loan application, and after seeing their financial reporting, I suggested, “You might want to consider hiring a nonprofit bookkeeper.”

Woman holding a calculator

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The pastor’s response, “Where would I find one that I can trust?”

I didn’t have a perfect answer for the church, as I was not located in their region of the country, but I did suggest that the church could check with a few CPA firms or other churches in the area for a suggestions.  In addition, I found a great article on the nonprofit website Blue Avocado, which offers a free test that churches or other nonprofits can use to see if the bookkeeper really knows their stuff.

Here is a sample question, from their blog post “Nonprofit Bookkeeping Test”:

Which of the following are typically included in the bank account reconciliation?
a) Bank service charges
b) Outstanding checks
c) Deposits in transit
d) All of the above

To view, or take, the full test, click the link above the question.

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Many churches and nonprofits have savings and endowment funds, but in many cases, these funds are under utilized and poorly managed.

For example, I visited a church recently that had over $150,000 sitting in a savings account at a local bank, earning around 0.25%.  That means each year the church is only earning $375 in interest.

In comparison, if the church had invested in any combination of money market funds, cd’s, or the stock market, it could have earned a significantly higher amount- at worse, a $150,000 in a money market account would have paid closer to $1,125 .

So let’s say that a church does decide to better balance its portfolio…where should it begin?

Well, there is no single answer, but here is a list of items to start the process:

  • What is our short term and long term objectives for this money?
  • What is our current financial position and health?
  • What is the future of our mission/ministry?
  • Where the funds designated for a certain use? (more…)

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Last year I wrote a post about how Parkhill Christian Church and how they were able to save money and increase their ministry by making several energy upgrades to their facility. 

The blog was entitled, “The Power of Knowledge…Literally,” and it has served as a great success story about how churches can improve their facilities, increase ministry, and save money- at the same time. This blog is a follow up to that post, and it is designed to see if these initial results continue. 

I recently called Rev. Chris Franklin to interview him about how the church was doing and if the church was still seeing great results from their participation in an energy audit and ministry planning session with Church Extension.  Here is a snapshot of the conversation:

John: Chris, so tell me, how are things going at the church?

Chris: I think we are in the midst of what we would have to call dynamic change, in part stimulated by the analysis of the Green Church building report.  The most startling was the the high relative cost of maintenance and utilities in comparison to the low utilization of the building for ministry.  The change in the model of ministry to use the building for community and those outside the church and to be welcoming in doing so is transformational and challenging.  Our numbers of visitors have skyrocketed, and the congregation is thrilled to see prospective visitors in church on a regular basis, but surprised they don’t join after a few weeks of visiting.  We did not have the mentality of having active visitors.

J: What have been the savings that you have seen over the past year?

C: We have started seeing the savings as we replaced lights as they failed and insulated in the most cost effective locations.  The financial chair thinks we will save up to $12,000 this year in electricity and gas.  (more…)

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Over the past year, the major conversation among nonprofit executives and donors has been, “How can we find metrics and evaluate the performance of nonprofits in their missions?”

The base comparison for the past few years has been the percentage that a nonprofit spends on overhead versus what percentage of a donation makes it into the mission of the organization.

For example, if a donor makes a gift of $100, and the nonprofit tracks that 90% goes to mission and 10% to overhead. This allows the comparison of nonprofits across various mission fields, even when the two organizations are unrelated (Red Cross versus Humane Society).

However, as this comparison is lacking context more and more donors and leaders are searching for other metrics and there was a great article in the Economist this week entitled, The Lessons of Philanthropy: Giving for Results. 

Typically, churches are late adopters to these types of tends (more…)

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At a recent Church Finance conference that I attended, I participated in a seminar that discussed the various audiences that churches have for reporting their financial information. The discussion began by listing some of the groups that receive financial data both inside and outside the church.

At first, the obvious groups of the church’s governing structure were listed:

  • Church Board (council, synod, etc)
  • Church Officers (president, moderator, chair, treasurer, financial secretary, etc)
  • Church Staff (pastor(s), administrators, etc)
  • Congregation

    Then, after a short pause, the additional groups were added:

    • Affiliated Ministries (schools, daycare, homeless shelter, food pantry, etc)
    • Sub Groups within the church (Sunday school leaders, Fellowship Chair, Elders’ Chair, etc)
    • Denominational Offices (national/general Offices, middle judicatories, etc)
    • Banks or Lenders
    • Government (federal, state, municipal)

    After listing each of these groups, we went back through to discuss how each group would use the financial data, why they would want it, and in what ways we could provide financial data in a vehicle that would be easy to understand based upon the needs of the audience.

    For example, a sub committee or group within the church may only wish to know the detailed information about  their budget and expenses each month, while a bank may wish to know more about the general income and expense of the church quarterly. And in both cases, the information provided and the manner to provide it is very different.

    Beyond just the type of reports that churches can create, we also discussed how a dashboard can be another helpful way to report and track specific goals or areas. Dashboards also give readers (viewers) an easier method to understand financial information, if they are not sophisticated financial readers. One good example of a dashboard is from the Indianapolis Museum of Art, check it out at http://dashboard.imamuseum.org/

    So if you are a church leader or a person tasked with financial reporting, take a moment to think about who your various audiences are and how you can change your reporting methods to assist the leadership of your organization.  After all, we have all been in meetings where we provide all kinds of useful financial information that just gets tossed in a pile, because our audience can’t read it.

    Photo Credit: audience for “Prediction Markets: Tapping the Wisdom of Crowds”

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