5 Tips for Operational & Capital Reserves
Aug 22, 2023
Most churches that have been around for a few years understand the need for reserves. If your church was open before the COVID shutdown, you were likely acutely aware of your reserves, or worse, lack thereof. For most churches, their congregations came through on giving. Whew! But, if your congregation hadn't, you would've either dipped into your reserves or made adjustments to your spending during that period.
But what about capital reserves?
Where do capital reserves come into play? Generally, if your church has only one "bucket" of reserves, they are a type of savings for whatever is a critical need at that time. It doesn't matter if it's an operational expense or if it's a capital expense. As churches acquire property their need for capital reserves increase because things deteriorate and need repairing or replacing more frequently. If you currently rent your facility and the property owner or manager is responsible for maintaining/replacing all the facility-related equipment, it's not necessary that you have capital reserves. But if you own any part of your property, it becomes less of an IF and more of a WHEN.
How we recommend setting up reserves:
- Fully fund your operational reserves first and set them aside. We have a free calculator for you to use but usually suggest somewhere in the 20 -25 week range of operational expenses. Establish this fund first and get it out of your operating account. This acts as your rainy day fund if you ever experience a season where you can't operate, you have a drastic change in income or the like. Think...COVID.
- Once your operational reserves are established, begin building your capital reserves based on either a percentage of your budget (eg. 1-2% annually) or based on square footage (X cents per square foot of your total facility). I know setting 1-2% aside for capital reserves takes a lot of your budget, but you'll be thankful when that HVAC breaks mid-summer and you have the funds to repair/replace it without wasting precious time on how to fund the project.
- Don't use your capital reserves as a way to fund the ongoing maintenance of your facility. Build those costs into your budget. Those aren't surprises. Expect them and budget for them.
- The older your facility, the more you should have in your annual budget for ongoing maintenance and the more you should put into your capital reserves. I know it seems like common sense but we often see churches try to play roulette with their aging property. Just don't do it. You won't win. Allocate the money you know the property needs.
- Don't overdo your reserves. There's no reason to have 1.5 years' worth of operational reserves and enough in your capital reserves to buy your property all over again. While I'm being extreme, I often see churches with too much reserves/just-in-case cash. At some point, you can certainly have so much in the bank where faith isn't a part of the finance equation because you can cover just about anything you want to accomplish...not to mention you can limit your church's ability to do ministry or even be generous. So be wise when it comes to reserves but do go to extremes.
Take the next best step:
Operational and capital reserves are just part of what our team manages through our remote accounting services, or advises on through remote CFO services.
If you have questions about where you are now or what you need to do next, we'd love to schedule a free discovery call with you.