Removing the Mysteries about Church Finance. Jerry L. Johnson

for which advance planning for the specifics cannot be anticipated. The church should maintain a cash account balance that is enough to cover current debts and payments. Since cash is a factor of tithes and offerings, which themselves may be subject to wide swings in their amounts, the business manager needs to make a cash forecast.

      Don’t confuse this with net income. Cash may be in designated accounts or designated for specific purposes. It is cash, nevertheless. Use this to balance what’s available against anticipated demands.

      b. There may be, say, $14,000 in the bank account, all of it designated for putting a new roof on the Sunday School building. Before using this $14,000 for anything other than a new roof, no matter how dire the need, the pastor must obtain permission from those who gave the money to use it for a different purpose. To do otherwise is to violate a trust between church leadership and the membership. However, so long as the $14,000 is in the bank, it remains part of the cash flow of the church.

      Net Income – This can be called “uncommitted income” or “unused income” but it is simply what is left after all demands (bills) for payment have been met covering a specific time period, such as a month or year. To finish the month and the year with a net income, even if it is small, is essential. The foolish grasshopper consumes everything it has. The wise ant stores up food (resource) for a leaner time. Even so, a church can go bankrupt while showing a net profit on paper. The reason: cash flow. This is only possible however when the accounting is set up on an accrual basis (you count what is owed to you as income even though it is not yet received). Using accrual basis can show a good net income but still there may be no actual cash. Remember, churches are set up on a cash basis, not accrual; accrual being extremely rarely used by churches.

      Margin – This is a percent figure that we will use more later. But first you need to know how to obtain the percentage. To figure income margin, take the total income figure, in this case let’s say that it was (for example) $391,000, and subtract the total expenses. The resulting number is net income. In this case $11,730.

      Figure 4-3 Figuring Margin

      

      Breakeven Formula – The breakeven point in revenue (sales, for commercial enterprises) volume is defined as follows: That point in sales volume or revenue, where direct costs have been recovered, fixed overhead expenses have been absorbed and at which profit begins.

      Here is the formula expressed with numbers taken from Figure 9-9, Annual Budget Example.

      Suppose the church decides to hire an additional office assistant for $300 per week. How would this affect the breakeven amount that has to be reached? Here is the way to calculate the new breakeven amount.

      Fixed cost – 251,784

      New Hire – 15,600 ($300 x 52 weeks)

      New fixed cost – 267,384

      New B/E – 506,074

      New monthly B/E – 42,172

      The new monthly breakeven amount is $2,460 more than before hiring the additional office assistant. The new monthly breakeven amount of $42,172 is within a few dollars of the average monthly income for the church ($56). The question for the church to address is whether they want to obligate church funds to this extent without a reasonable expectation of increasing church income. This formula applies to any enterprise, including churches.

      The next question is whether adding that person will result in the ability to add that much revenue. If it does not, then why would (or should) you consider adding the person?

      The answer is not whether we will break even, but rather how much we will possibly gain by adding that person.

      The cost of the person is a relative certainty, while the benefit (s)he will create is just an estimate. Chances are that the person will cost at least what we thought it would be, and the benefit will be less.

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      1There is an important point about 501(c)3 status for a church. They are not required to request 501(c)3 status from the government when they qualify to be a church.

      SECTION 4 REVIEW

      1. Can you compute net margin if the church had negative income at the end of the year?

      2. Since the church pays no taxes, is net income still important?

      3. Does the balance sheet show the complete wealth of the church?

      4. By reviewing the monthly trendline for the balance sheet, would you be able to foresee financial difficulty ahead?