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Rainy Day Funds for Churches
By: Tammy Bunting

In personal finance, it is a rule of thumb to have between 3-6 months of expenses in a rainy day or emergency fund savings account. The reason for doing this is to protect you during unexpected life events, like losing your job. 

Most church leaders would also advise keeping 6 months' worth of expenses in an emergency savings account. The same idea applies, and the purpose of this money is to cover general operating expenses in the event of an emergency. This way the church knows it has money set aside to help cover payroll, mortgage payments, and other expenses.

What about those that ask the question, why do we have a savings account when there are souls that need to be saved?

 "…it was far better to preserve souls than gold for the Lord. For He Who sent the apostles without gold also brought together the churches without gold. The Church has gold, not to store up, but to lay out, and to spend on those who need. What necessity is there to guard what is of no good? Do we not know how much gold and silver the Assyrians took out of the temple of the Lord? Is it not much better that the priests should melt it down for the sustenance of the poor, if other supplies fail, than that a sacrilegious enemy should carry it off and defile it? Would not the Lord Himself say: Why didst thou suffer so many needy to die of hunger? Surely thou hadst gold? Thou shouldst have given them sustenance. Why are so many captives brought on the slave market, and why are so many unredeemed left to be slain by the enemy? It had been better to preserve living vessels than gold ones." - Ambrose, On the Duties of the Clergy, 2.28.137

Ministry finance departments must maintain a healthy balance between the outlook that God will provide and that any available funds should be used to serve community and congregation vs. the view that it is our responsibility to plan ahead and prepare for leaner days. Your church can't fulfill its mission if it is unable to operate successfully. Available cash is key to keeping the doors open and continuing to do good works.

For ministries, financial resources are limited. Determining how much cash reserves are needed can be difficult and often feels like a shot in the dark. So, what is the appropriate amount of cash reserves?

First off, let's determine exactly what we mean by "cash." For ministries and other non-profits, cash doesn't just refer to the amount of money in your bank accounts. "Cash" is what's available for general ministry expenses by subtracting the donor-restricted funds in your ministry's cash reserves. When determining available cash, operating lines of credit can also be included.

Liquidity management is a crucial task for every ministry. Seemingly large cash reserves and lines of credit won't necessarily be enough when unanticipated expenses, unexpected opportunities, economic hardships, or changes to your donor base arise.

Step 1: Historical Cash Flow
So, how can you determine the right amount of available cash? Start, if possible, by looking back at 3 years' worth of monthly cash balances to determine what months tend to have the highest and lowest numbers. Find the variation between these ups and downs, and you'll have a starting point looking forward. To account for growth, it is then wise to add a buffer, at least 15%, to this variation.

Step 2: Predictable Expenses
The next step is to map out your predicted expenses for the coming year, creating a forecast of your cash flow. This forecast should include real-time reviews to make sure it is realistic and matches actual events. The forecast should also be revisited at least quarterly to make sure things haven't changed. Cyclical changes in cash flow – predictable seasonal ups and downs – can be covered in part by operating lines of credit. Lines of credit generally must be paid in full for 2 to 3 months per year, so that should be taken into account.

Step 3: Possible Unplanned Expenses
Next, make a list of possible risks and potential unplanned events that might affect your ministry's cash reserves. You can start by looking back at past events to get an idea of possible risks. Then determine what the fiscal impact might be for each potential risk, as well as the likelihood of that event occurring, whether it be losing a tenant leasing church property or losing a major church donor due to relocation or illness. You can multiply the financial impact of each event by its likelihood (%) to determine the cash reserve you need for that event:

Loss of Rental Income: Financial Impact ($50,000) X Likelihood (30%) = $15,000 cash reserve

Some best practices in planning for risk:

• Meet with ministry leaders each year to brainstorm possible risks and unplanned events that will have a financial impact on cash reserves.
• Look at your church's top donors and what percentage of overall income they provide. This can help you understand the risk of losing one or more key donors.
• Set up a separate fund for maintaining capital items (roofing, air conditioning and heating systems, parking lots, etc.) and determine the maintenance and replacement lifecycles of those assets. Knowing when a roof will need replacement will allow you to budget enough cash each month until the expected replacement date, avoiding big expenses down the road that can deplete your cash reserves.

Step 4: Opportunities
On a more positive note, there may be new opportunities to add to or expand your church's mission. It's a good idea to look ahead at what new programs, ministries, or additional staff members you might want to add in the future. Brainstorm these opportunities, list them, and prioritize them by cost, likelihood, and impact. The same formula can be used as outlined above:

Opportunity – Establishing a Community Daycare Program:
Cost ($40,000) X Likelihood (50%) = $20,000 cash reserve

Make sure you have a policy for managing and determining which opportunities will get funding – set up processes for proposing new opportunities as well as approving them.

Add It Up
To determine your cash reserves, add your cash flow fluctuation plus the cash reserve you determined for unplanned events as well as opportunities. If you don't have enough cash reserves to cover this amount, make a plan for reaching that balance either by improving operating efficiency, maximizing income, or reducing costs.

General Guidelines
While the above guidelines are certainly recommended for determining cash reserves and rainy day funds for your organization, here are some suggestions for three unique ministry types:

• Churches: Church giving is generally steady and predictable, but unforeseen events (the unexpected departure of a pastor) can have a dramatic financial impact.  It's a good idea to have 2 to 3 months of operating expenses in your cash reserves.
• Parachurch Organizations: Donations tend to be less regular and take longer to receive, so a cash reserve of 3 to 6 months of operating expenses is ideal.
• Christian Schools: With tuition making up the majority of a school's income, and its seasonal nature, a cash reserve of 3 to 4 months of operation expenses is recommended.

Always remember that "the best laid plans" can sometimes fall short.  In order to help your finance team manage the plan, be sure to equip them with the tools they need to streamline the daily operations, establish long term solutions for organizational growth, and produce accurate financial reports for the key decision makers. Management has better control when it can spend time analyzing financial information instead of simply trying to process transactions and manage daily aspects of the accounting department.

Tammy Bunting is the director of Not-For-Profit Services for AcctTwo Shared Services LLC, www.accttwo.com.

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