When it comes to financial reports, churches are often really good at printing these reports and providing them to the elder, deacon, or finance teams. What churches are not typically good at is how to get usable information from those sheets. Let's look at one common mistake (and a fix) that can help ensure you're not tanking your cash flow without knowing it.
For our conversation, most organizations look at three primary financial statements to get a bird's-eye view of their financial health: Statement of Financial Activities (Aka Profit & Loss in a business), Statement of Financial Position (Aka Balance Sheet), and Statement of Cash Flows. Since churches rarely use a statement of cash flows (although it's a VERY useful tool), we're just going to talk about the Statement of Financial Activities and the Statement of Financial Position.
It is important to understand that financial statements flow into one another. No single financial statement paints the whole picture by itself. They require one another to reveal all that is going on. The most common problem I see (and the one we're going to focus on in this article) is that oftentimes, finance teams exclusively use the Statement of Financial Activities (in Budget vs Actual format) as their compass towards financial health. If that's the case for your church, you could literally have tens of thousands of dollars in payments you're not considering if this is the exclusive statement you use. By doing so, you'll be making decisions based on incorrect information which could be quite harmful to the financial health of your church.
Let's look at an example:
From the Statement of Activities:
Church's Budget Revenue for Sept. 2021: $200,000
Church's Actual Revenue for Sept. 2021:$220,000
This means we had a surplus of $20k in revenue. We'd all agree that we did well according to our budget, right? Now let's look at our expenses.
Budgeted Expenses for Sept. 2021: $200,000
Actual Expenses for Sept. 2021: $199,999
At-a-glance, most of us would be pretty happy with the results of this month. If we looked solely at our Statement of Activities report with this information, it would show we created a surplus of $20,001 for Sept. 2021.
So what's the problem here? If we have any type of payments (loans, lines-of-credit, etc.), the total of those payments don't show on the Statement of Activities report, just their interest portion. The principal portion is only represented on the balance sheet and the statement of cash flows. So let's continue our example.
From the Balance Sheet or Cash Flow Statement:
This means we have another $21,000 of cash leaving our possession that isn't represented on the Statement of Activities (we'll assume these are going to principal for simplicity sake). So while we thought we had a surplus of $20,001 that we could "bank" for another day, we actually lost $999 in that month.
You can see pretty quickly how if we don't see the entire picture, you could be making uninformed decisions based on incomplete information. Why this specific scenario matters is that many churches have short falls in cash each month and deplete their reserves over the course of a year or two without even realizing it.
So here's a practical fix to ensure this type of mis-information doesn't happen to you.
- All loan/note payments
Effective net income
Seeing this "real-world" net income is a much bigger indicator of your financial health over a period of time as it tells you whether or not you've had adequate funds coming in for the amount of expenses and payments going out. A few things to consider: