Burt was confident about everything in his new role as his church’s operations director, except for church finances. Fortunately, the church had a part-time bookkeeper who came in two days a week to handle most of it. She did the picky stuff like deposits, payments, payroll, and accounting. Burt only had to manage the budget. He had to keep everything on track, making adjustments as church collections went up and down, and responding to member inquiries. Still, finances weren’t his favorite thing. Indeed, just the opposite: Burt silently groaned every time he turned his attention to them. He wondered how long that would last.
Controls
Sound management of your church’s finances is critical to your church’s success. Financial management begins with a strong governance structure. In a church of any significant size, the church’s governing board should be approving an annual budget developed by the church’s executive team and supported by a volunteer finance team. The church’s executive team and ministry leaders should then stick to the budget through the year, using the budget to guide their expenditures. The church should also have bookkeeping controls for things like bank reconciliation. Governance and controls require specific policies and procedures. Having a budget does no good if no one refers and adheres to it. Even in a small church, the governing board should be approving and monitoring the budget.
Procedures
Strong governance and controls, though, are not enough. Financial procedures are also important. Sound financial management should include specific, detailed procedures on both income and expenditures. On the income side, churches benefit from clear procedures on handling collections and online giving, accepting designated funds while treating them properly, pursuing a capital campaign, building an endowment, and accepting donations of stock, vehicles, or other items. On the expenditure side, procedures should exist for authorizing expenditures, making purchases, paying denominational shares, managing payroll, and reimbursing staff members and volunteers. Financial management through sound policies, procedures, and controls is not the favorite activity of many staff members, church members, and volunteers. But sound financial management blesses the church. Consider the following financial policies and procedures. Refer to the book Church Policies & Procedures: Common-Sense Guides for Administering Churches in a Complex World for example financial policies.
Oversight
Your church does well to have regular financial oversight by a finance committee or team of church members with financial expertise. Having an accountant on your church’s finance team can provide the church with consistent expert oversight. Bankers, bookkeepers, business owners, homemakers who manage their household budgets, and others with financial expertise can also contribute substantial budget insight. The church’s pastor or operations director and bookkeeper should present monthly or quarterly reports to the finance team for the team’s review, comment, and approval. Having one of the church’s board members on the finance team can ensure that the board remains well informed. The finance team can help the pastor or operations director, as advised by ministry leaders, develop a mission-driven annual budget for the board and congregation to approve. The finance team can also help develop and refine procedures to receive, account for, and disburse church funds. The finance team may also review insurance, financing, debt, cash reserves, and funds for capital improvements. Promoting planned giving, overseeing foundation funds, and ensuring proper computer-system controls and retention of church financial records may be other finance team roles.
Shares
Churches belonging to denominations typically contribute a portion of their income to the denomination. They may also contribute to a local or regional body of the denomination and to denominational missions. Denominations call these contributions shares, referring to paying a fair share for denominational initiatives and expenses. The denomination or its regional or local body typically assesses the local church its share based on its number of members, budget size, or a similar measure. Some local churches pay the full assessed share while others only a portion or even none of it, depending on the availability of funds, whether the church is conducting its own missions, and how closely the church identifies with the denomination. Give thought to how to treat denominational shares.
Soliciting
Churches depend on generous giving. Members desire to give. Your church should regularly afford members the privilege of giving. Your church should also discern and promote a biblical basis for giving. The scriptures say that God blesses generous givers, returning more than one can give. Your church’s leaders should want to extend that blessing to all members. Yet when churches inform their memberships about giving, they should have a sound and thoughtful approach for doing so, consistent with how the church’s pastor and governing board discern the scriptures applying in their context. Your church could, for instance, solicit giving based on the promised return, the church’s needs, the principle of tithing, responsibility to the body, benefit to the body, benefit to missions and the community, or a mix of those and other grounds. Your church should also decide who promotes giving and how to keep the church informed of giving needs. Developing a solicitation policy helps a church study, discern, and promote a sound, consistent, scriptural basis for giving. Consider the solicitation policy in the appendix at the back of this guide.
Collecting
Churches handle substantial cash and checks. Church donations are not spread out across a full week of business hours but instead concentrated on Sunday mornings or at other service times. Moreover, businesses use secure cash registers and electronic payments, while churches often receive many of their donations in open collection bowls or plates handled by members and volunteers. A church’s unusually insecure pattern of financial receipts demands responsible financial security procedures. Churches unfortunately lose collections to theft, conversion, and embezzlement. Ensure that your church has a responsible collections procedure. Have two unrelated persons together gather, count, and secure cash and check donations. Place counted donations in locked deposit bags and deliver them immediately to the bank’s depository or retain them in a safe or locked file drawer until you can deliver them to the bank. Lock any office in which the church secures funds or financial records. Use security cameras in areas where staff members or volunteers open mail and handle cash and checks. Don’t allow theft and loss to damage confidence in your church’s financial management.
Online
Some members prefer the convenience of making direct deposits of their tithes and offerings from their bank or employer to the church’s bank, rather than handling checks or cash every Sunday. Churches can accommodate direct deposits, with appropriate procedures. Communicate to members the church’s willingness and ability to accept direct deposits. Provide written directions for direct deposits, involving sharing with the donor’s bank or employer the account and routing numbers for the church’s account at the church’s bank. Other members prefer the convenience of online giving. Your church can solicit and receive online giving through its website and electronic church management system, while encouraging members in worship services to give online from their cell phones if they prefer doing so, over placing cash or checks in the collection bowls. Give clear instructions on the website and service marquee slides, especially when changing or adding giving methods.
Reconciliations
Your church’s bookkeeper should reconcile internal accounting to monthly account statements that banks or other institutions holding the church’s funds supply. Reconciliations are especially important for churches without substantial cash reserves. Not having the funds when one believes one has the funds can lead to insufficient-funds (NSF) checks, with potential civil liability, criminal responsibility, and credit issues to follow. Reconciliation can also ensure the security of funds. Just because church financial records represent that funds are where they should be, doesn’t mean that the funds are there. Reconciling internal church financial records against the bank statements addresses that concern. Commit your church to reconciling records with statements, in a secure process with oversight from the pastor or operations director and finance team.
Payroll
Managing payroll is a special concern in any church. Payroll is a complex function requiring the help of skilled professionals to comply not only with tax laws but also wage-and-hours laws, state registration requirements, child-support withholding orders, garnishments, and other law, rule, and regulation. A church can manage its own payroll by relying on a skilled bookkeeper using an electronic bookkeeping and payroll system, with occasional consultation from an accountant or lawyer. Whether a church manages its own payroll using an electronic payroll system or works with a payroll service, the church needs sound payroll procedures. New employees must submit IRS Form I-9 with appropriate documentation of work status and IRS Form W-4. They may need to submit a health savings plan designation and 401k authorization if the church offers those plans. The pastor or operations director must approve payroll disbursements to confirm that each employee receives the correct wage amount and sign IRS Form 941 quarterly payroll reports. The church must also remit state payroll taxes. And the church must ensure that employees receive their annual IRS Form W2s and the IRS receives its annual Form W3. Get qualified payroll assistance, and keep payroll straight.
Expenditures
Churches need to incur, manage, and pay their just obligations timely. A sound bookkeeping system assigns payments to specific accounts. A plumbing repair charge goes to the maintenance account and health insurance payment to an employee-benefits account. Churches with ministry leaders assign ministry account management to the leader, for the leader to incur charges. A facilities director would manage the maintenance account, for example, while a worship director would manage expenditures for musical instruments and seasonal sanctuary decorations. In this way, a church can both empower ministry leaders to carry out their ministries while holding them accountable to the church budget, through each account. Churches should also have sound procedures for the operations director to approve payment of, and the bookkeeper to pay, each charge, on the account leader’s documentation and request.
Purchases
Approving expenditures is one task. Executing a purchase is another task. Churches need secure and systematic ways in which to purchase goods and services. Several different staff members may regularly make purchases with several different vendors, each vendor having their own payment requirements or options. A sound purchasing policy provides payment options, establishes a purchase process, controls credit risk, and limits purchases to staff members with budget accounts. Credit cards are appropriate because of the prevalence of online ordering, where credit payment is the usual means. Issue cards from the church’s full-service bank to ministry leaders making regular online purchases against their ministry budgets. Have them reconcile their monthly credit-card statements against the receipts for their approved transactions. Limit the credit cards to $1,000, $2,000, or whatever lowest regular monthly amount the ministry leader needs to complete the ministry. Have an alternative system for staff members to request a check from the bookkeeper, approved and signed by the operations director, for other purchases not paid under a subsequent invoice.
Expenses
Ministry leaders and other staff members may also incur small out-of-pocket expenses in carrying out their ministries. A pastor or ministry leader may, for instance, pay for parking and buy a key volunteer a cup of coffee or sandwich at a ministry conference. While prudent financial managers watch these costs closely, these kindnesses may be especially important in church settings where relationships matter more than transactions. Have a reimbursement process with clear guidelines and limits, out of a well-managed budget. The church offices may also need petty cash on hand for incidental expenditures such as purchasing stamps or enabling volunteers to feed parking meters and pay highway tolls en route to ministry conferences. Petty cash can be a peculiar source of mistake, misuse, and temptation to commingling. Have a clear guideline for its use, and keep the petty cash under an administrative assistant’s lock and key.
Adjustments
A church’s budget anticipates ordinary expenditures. Churches nonetheless remain sensitive to God’s leading. A church may need to address unanticipated expenditures outside the budget during the year. The church board, on the recommendation of the finance team in consultation with the pastor and operations director, should review and approve expenditures outside the budget. Classify expenditures as either a capital item or operating expense. Pay an operating expense from surplus income or designated gifts. Pay capital items from designated gifts, sinking funds, and capital campaigns. Resort to bank loans, credit cards, or other borrowing only for critical operating needs and with a clear and reasonable plan to promptly retire the debt. Do not incur larger credit card charges than the church is able to pay to zero every month.
Property
Churches ordinarily welcome gifts of real or personal property, beyond cash tithes and offerings. In-kind gifts, whether designated for a specific ministry or for the church’s general fund, can make a substantial positive impact in a church’s ministry. Donors may offer vehicles, boats, appliances, furniture, pianos, organs, and other musical instruments, artwork, building materials, trees and plants, and other real or personal property items. A church may be able to convert some of these gifts into cash to apply to ministries, if the donor so intended and the church has no use of its own for the gifted property. In other cases, the church may not be able to readily sell or otherwise convert the item to cash, or the donor may not wish to see such prompt conversion, instead intending the item itself to serve the church. Some donated items may burden the church with storage and maintenance costs, and may present health or safety risks. Adopt a gift policy that addresses these and other important issues around whether to accept a gift.
Designation
Donors sometimes prefer to designate their gifts to specific ministries, programs, or functions within the church. Churches generally accept designated funds when the designation is clearly within the organization’s traditional way of advancing its mission. Adopt a designated-funds policy that both guides church leaders in determining whether to accept the gift and in how to accept and account for the gift. Communicate to donors that the church may apply designated funds outside the designation if curtailing the program or when donors give more than the designated ministry requires. Hesitate to commence a new ministry solely because a donor desires to fund it, especially if the ministry is outside the church’s focused mission and implementation plans.
Securities
Tax law favors the transfer of appreciated stock, bonds, or other securities directly from the donor to the church or other qualified charity. One might think that the donor would simply sell the security and donate the proceeds, but appreciated security sales ordinarily create a taxable gain to the donor before the donor conveys the proceeds. Both donor and church lose. Thus, donors often wisely prefer to donate the appreciated securities. Churches wishing to help donors and themselves with this tax advantage should have a policy to accept and convert gifts of securities. The key to such a policy is that the church would ordinarily not hold the security for any time, no matter how attractive the prospect of further gains. Prudent management of funds ordinarily requires that the church promptly sell the security, converting the asset to cash even if the church does not intend to immediately expend the funds. Adopt a prudent policy for accepting and converting a securities gift through a responsible broker.
Endowments
Endowment funds can support a church’s general fund and special ministries. An endowment fund places donor gifts into trust, if not with the church’s own foundation then with a third party such as a community foundation, to preserve the principal but annually release a portion of income or appreciation to the church. A substantial endowment can produce enough income to provide meaningful annual support, stabilizing up-and-down cycles of church giving. Not all churches agree with endowment funding. Some churches prefer that current members have the responsibility and opportunity of giving to support the church’s ministries. Yet some large donors may prefer making an endowment gift that blesses over the long term, rather than a large one-time gift that the church might expend within a short time. A compromise may be to establish an endowment fund without publicizing it, allowing its use by major donors who prefer to do so, while not discouraging others from participating in the blessing and discipline of giving.
Reserves
Churches may accumulate rather than promptly expend excess income over expenses. Cash reserves of three to six months of the operating budget are generally wise, to ensure the church’s ability to pay staff and ongoing obligations in the event of a sharp downturn in giving. Accumulated reserves may also seed a capital campaign for repairs, renovations, or new construction. Managing cash reserves prudently in federally insured interest-bearing checking or savings accounts, certificates of deposit, or money-market funds can measurably add to the church’s income. Monitor cash reserves for their total amount and trend or direction, and adjust budgets and expenditures accordingly. A church that cannot pay its staff and does not pay its bills is no credit to the kingdom.
Reflection
Does your church maintain reliable controls over finances? Does your church have a finance team of lay church members monitoring and guiding the operation director’s financial management? Does your church belong to a denomination requiring regular payment of denomination or mission shares? Does your church have a biblically sound policy and plan for encouraging giving? Does your church accept direct deposits and online giving? Are your church’s operations director and bookkeeper regularly reconciling accounts under finance team monitoring? Is a skilled professional handling your church’s payroll? Are all staff expenditures out of monitored budget accounts? Can ministry leaders incur charges for which they are accountable to their budget account? Does your church have an accountable procedure for reimbursing employee expenses? Does your church accept gifts of real and personal property including securities, under a prudent policy for management? Should your church have an endowment fund? Does your church maintain adequate cash reserves?
Key Points
Churches should have secure and prudent controls over finances.
Put financial procedures in place for staff and volunteers to follow.
The operations director and finance team should oversee finances.
Churches may need to pay denominational and mission shares.
Churches should have a biblically sound plan for encouraging giving.
Churches should have secure procedures for collecting donations.
Churches may invite direct deposits and online giving.
The bookkeeper and operations director should reconcile accounts.
Payroll requires a qualified service or skilled bookkeeper.
Expenditures should be out of budgets by responsible staff leaders.
The church should have a clear process for approving purchases.
Maintain a policy for reimbursing staff members for expenses.
Expect to make periodic budget adjustments with board approval.
Consider accepting gifts of real and personal property under a policy.
Consider accepting funds designated to ministries, under a policy.
An endowment fund may be appropriate for large, long-term gifts.
Maintain a cash reserve of from three to six months operating expense.