Running a church financially requires savvydeveloping a higher level-of-understanding in these areas will help you lead, better.
Among the most common frustrations Thom Rainer, president and CEO of LifeWay Christian Resources hears from pastors, according to his recent blog post are, "Expectations to understand the business and leadership side of church life," and "I have no idea about some of the financial decisions I'm supposed to lead at church."
"Seminary did not prepare me for this." If you don't have an executive pastor or church business administrator on your team, you may feel like you're trying to wear too many hatsand some just don't fit. While the senior pastor doesn't have to be an accounting expert, you do need to know a few basics so you're prepared to make wise financial decisions.
Much like your doctor will look at your blood pressure, heart rate, temperature and other vital statistics to check on your physical health, financial reports provide insight into your church's financial health.
You need to know where money is coming from and how much. You also need to know where money is going, for what purposes, and how much.
Developing a plan for income and expenses each year, plus monitoring that plan throughout the year is also part of good stewardship. As executive pastor David Fletcher wrote, "Financial reports tell the implementation, or lack thereof, of a church vision statement."
With that in-mind, here are five key areas that having at least a high-level understanding of will help you lead your church:
Key #1 The Chart of Accounts
The foundation of your church's financial information is the Chart of Accounts. This is a list of accounts for categorizing income and expenses. Income accounts could include "Tithes", "Special Offerings", "Bookstore Sales", "Event Tickets," and more. Expense accounts may include "Salaries," "Building Maintenance," "Mortgage/Rent," "Office Supplies," etc.
Each time your finance office receives an invoice, they should record that expense in your church's accounting software with the appropriate Chart of Accounts category. The same thing goes for recording tithe deposits or online offerings. Each transaction should have an account assigned to it. The purpose of having a Chart of Accounts is so you can run reports to show a summarized view of the church's finances. Executive pastor Kevin Stone recommends thinking in terms of reporting when setting up a Chart of Accounts.
Key #2 The Income Statement (or Income & Expense Statement)
An Income Statement is a financial report that includes the income categories from your Chart of Accounts (Tithes, Bookstore Sales, etc.) along with the expense categories (Salaries, Building Maintenance, Youth Ministry, etc.). The amounts included in this report are usually for a specific period of time such as the prior month and year-to-date. Your accountant can also provide you with a column to show whether the actual income/ expense amount for that month was above or below the budget for that same month. They may also include a column to explain any significant variances ("$1,000 under budget is due to receiving a discounted price on t-shirts for the youth event").
You'll want to look out for any significant variances from the budget (over or under) and make sure you receive an explanation for those differences. That information can help you make informed decisions about whether to talk with a ministry leader about reining in expenses, or perhaps it helps you see that the budget wasn't realistic.
Key #3 The Balance Sheet
The Balance Sheet tells the story of how your church is doing financially at a given moment in time (usually as of the end of the prior month).
There are three parts to the balance sheet: ASSETS: This includes what the church owns at that time such as cash in the church's bank account(s), any petty cash you have at the church, special funds, land, buildings and equipment.
Note: Some accountants will separate cash assets from land/building/ equipment assets into separate sections on the balance sheet or another report entirely.
LIABILITIES: This is what the church owes other organizations/companies. This includes accounts payable (the electric bill that was received and entered into the accounting software, but hasn't been paid since it's not due for another 10 days), any donor restricted funds (building campaign, etc.) or other misc. funds.
NET ASSETS: Assets minus Liabilities equal the church's Net Assets. What this means is if your church had to close down, the Net Assets number is what money the church would have left once it sold all it's assets and paid all liabilities.
TO SUMMARIZE: Assets Liabilities = Net Assets
Key #4 The Budget
Just like we create a budget for our personal finances, we need to have a budget for the church's finances.
Each year, your church leadership team needs to develop a budget based on at least these key factors:
How you plan to carry out the vision and strategy of the church in the coming year (what programs / events will you hold and when, will you launch a new campus, do you plan to hire more staff members, etc.). What you expect to have in income and expenses based on prior year trends.
Each ministry area leader should review their department's financial performance from the prior year. Then combine that with their plans for the upcoming year, and recommend a budget for their area. From there, you'll need someone to compile the overall budget, including building maintenance work, replacing worn-out furniture or equipment and income/expenses for new church wide initiatives, etc.
Once the budget is approved, hold each ministry area and leadership team member accountable for staying within budget. You'll need to review the Income Statement each month and check the variances to see how each leader is performing.
Key #5 Internal Controls The term "Internal Controls" refers to the processes put in-place to ensure the church's accounting is accurate and completed based on certain standards. This includes a concept called "Segregation of Duties," which is the main item we'll focus on here. Segregation of Duties is all about preventing fraud / theft or even the appearance of such.
Here's an example: When the ushers take up the offering and hand it off to staff members, there should never be less than two approved staff members in the room with the offering to count it.
Here's why: Let's say the offering this week is dramatically less than normal. If Susie was the only person in the room to count the offering, then Susie could be accused of stealing money. However, if Susie, John, and Angela were all in the room the entire time and each did their own separate count of the offering, then it's much less likely that anyone stole from the offering.
Another example involves paying church bills: You should never have the same person handle all of these aspects of a transaction (adding a company as a new vendor in the accounting system, entering an invoice into the accounting system, printing a check to pay the bill, and signing the check). In that scenario, an employee could add a fake vendor to the accounting system, enter a fake invoice, print a check and sign itall while cashing it as if he/she was that vendor. I'm not suggesting anyone on your staff would do such a thing.
However, other churches have dealt with theft from within the team due to a lack of internal controls / segregation of duties.
Don't let your church be exposed to that same fate. These processes also protect your team from false accusations. Senior Pastors wear many hats and are largely responsible for recommending, if not making, financial decisions for the church.
Knowing what financial reports you should review and what information each provides, plus considering the budgeting and controls processes can help you make more informed decisions for the church.