## OVERVIEW
Preaching and teaching God’s financial principles go hand-in-hand to build a strong culture of stewardship and generosity. Good stewardship implies not only saying the right thing, but practicing what you preach.  
  
There is a true story of a recently appointed church finance committee member showing up at a meeting for the first time. As the new member looked over the balance sheet, he noticed the stated amount of cash on the committee’s ledger was nearly twice as much as the combined balances in the savings and checking accounts. Not wanting to interrupt the meeting, he remained silent, waited until he got home and checked his copy of the most recent church business meeting notes. The same cash balance was listed. He then called the treasurer to ask about other financial accounts. The treasurer said there were no other accounts. The treasurer also shared that had everything gone “as planned” over the past three years, the amount shown was what they should have had but didn’t want to raise any concerns in the congregation. The new board member quietly submitted his resignation and looked for another church.  
  
Have you ever heard someone tell you they stopped giving to their church because they no longer trusted how money was being handled? How do we build trust around money in our church? Is there a secret set of rules we should be using? In **Luke 14:28**, Christ himself said we should calculate the cost of a project before we undertake it. **Proverbs 21:20 TLB** says, “The wise man saves for the future, but the foolish man spends everything he gets.” **Proverbs 3:27-28** tells us to pay our bills on time when we have the money. **Psalm 37:21** says to pay our debts. **Proverbs 6:6-8** instructs us to save during good times so we will be prepared for lean times.

## APPLICATION
In application, are we saving for the summer giving slump? Do we live on less income that we take in and hold some funds in reserve? Some leaders promote the idea of budget planning based on 90% of the previous year’s income for the coming year to provide margin. Do we have a sinking fund to repair or replace things that wear out like the HVAC system, carpet, roof repairs or repainting the parking lot? Do we have an adequate cash reserve to pay the deductibles for an event covered by property insurance? When we need to build or remodel, are we raising as much as we can before starting the project, borrowing as little as possible and paying it off as soon as possible? When we consider a new building, do we have a sure way to repay?  
  
In many ways, managing money in church is like managing money at home. The qualifications of a leader from **1 Timothy 3** identifies someone who also leads their financial household well. We plan spending to live with margin, save for the future, repay debt, and provide for those we love. How can we mirror good financial management in the church?  
  
The Evangelical Counsel for Financial Accountability, ECFA, details “Seven Big Financial Rocks for Church Governing Boards”.<sup>1</sup> An article written by Dan Busby and John Pearson, has been generously shared with permission from ECFA.

  
<div style="text-align:center;">
<strong>7 Ways to Avoid a Financial Train Wreck: Financial derailment of a church is usually a collective failure, but the finger almost always points back to the governing board.</strong></div>

<div style="color:#848884; border:1px solid #000000; padding: 8px 20px; text-align:center; width:90%; margin:auto; font-weight:bold; margin-top:20px">
The clear communication and understanding of church finances is a key to avoiding a financial train wreck and helping a church be a positive witness for Jesus Christ.
</div>
  
  
In church governance, high attention must be given to the spiritual aspects of the church -
focusing on the spiritual health of the body.  

All too often there is a tension in church governance between spiritual matters and faithful administration of financial resources. It is easy for the financial administration of a church to take a backseat to the spiritual matters. There must be a balance of both the spiritual and material.  
  
When too little attention is paid to faithful administration of church finances, it invites a financial train wreck. Sometimes, a train wreck is avoided, but a church may endure a very rough stretch of track.  
  
So, how can a church significantly reduce the likelihood of a financial train wreck? Begin by ensuring your board includes members who are highly competent in understanding church financial reports and nonprofit accounting. Then there are the seven “big financial rocks” for church governing boards:  
  
### KEEP BORROWING UNDER CONTROL.
When there is a church financial train wreck, it often relates to too much debt. Yes, the derailment may relate to a sudden pastoral change, a significant downturn in giving, a fall-off in attendance, and a variety of other factors. But, in the final analysis, there is often more debt than can be realistically serviced by the church.  
  
### ESTABLISH A STRONG STEWARDSHIP CULTURE.
A church governing board must set the tone for a strong stewardship culture for the entire church, including financial integrity and accountability. A sound stewardship culture rarely travels from the bottom of the organization up to the governing board—it almost always travels down the chart.  
  
What does a strong stewardship culture look like? The governing board knows and respects the budgetary and financial reporting processes. The financial staff respect the authority of the governing board. Further, the board oversees the risk assessment and internal control structure for the church.  
  
### APPROVE REASONABLE OPERATING BUDGETS.
Every church should have an operating (and perhaps a capital expense) budget that is annually approved by the appropriate oversight body (e.g., congregation, board, or committee). The church budget provides a rail or a curb for influencing financial activity. It is important that the budget process supports the church’s strategic plan. Reasonable projections of church revenue and expenses mean the church is not adopting a stretch goal, which is almost impossible to attain. A good budget process means that 11 acts of war can be eliminated because one annual battle is substituted for 12 monthly skirmishes.  
  
### MAINTAIN ADEQUATE CASH RESERVES.
Adequate cash reserves allow obligations to be paid on time, which is a positive witness for
Jesus Christ. Cash reserves are the cushion that ensures:

- Operating expenses are paid on time instead of incurring late fees.
- A temporary downturn in giving does not result in a sudden staff layoff.
- The church is in compliance with mortgage covenants, and the financial institution does not enforce negative consequences.
- Funds are available to replace worn-out HVAC, roofs, and more.
- The church has the necessary funds ready to open a new site or launch a new ministry instead of starting from scratch.
- Funds are on hand to cover all donor-restricted or designated gift balances.


In determining the adequacy of church cash reserves, the critical question is whether there is adequate cash at the church’s lowest cash point in the year—which is generally during the summer months. This will often be two to four months of operating cash.

### HONOR GIVER EXPECTATIONS AND INTENT.
Most churches receive gifts that have been designated (“restricted” is the technical accounting term) by givers. A gift might be designated for the missions’ fund, the building fund, the benevolence fund, and so on. Designated gifts must be spent for the giver’s intended purpose in a timely manner.  
  
Two more important thoughts: (1) To honor giver expectations and intent, a church must
segregate the revenue and expenses relating to designated gifts in the accounting records, and (2) church governing boards rarely have the authority to overturn a giver’s designation.   
### USE APPROPRIATE FINANCIAL TRANSPARENCY.
Churches must find the “sweet spot” between absolute financial transparency and no
transparency—we call it appropriate transparency—where trust is maximized with minimal
disruption or risk to the church.  
  
With absolute financial transparency, NOTHING is confidential. Transparency at this level is rarely practiced. Consider the resulting havoc if a church shared the names of givers and the amounts they gave.  
  
The other side of the continuum is no transparency. Everything is secret. This fuels negative perceptions. Nothing will rain on a church’s parade more than the perception that something shady is going on with the finances. If givers don’t have high confidence that their gifts are being stewarded with wisdom and in ways that tangibly support the mission of the church, they often dial back their giving. While the complete lack of transparency may work for a while, it is rarely positive in the long term.  

### CREATE A COMPENSATION PROCESS FOR THE SENIOR PASTOR THAT MODELS HIGH INTEGRITY.
This very important “big rock” has its own lesson.  
  
The faithful administration of church finances is not an easy task. In fact, the Apostle Paul says we should take “pains” to get this right, “not only in the eyes of the Lord, but also in the eyes of man.” In so doing, we will “avoid any criticism of the way we administer” the church resources. See **2 Cor. 8:20-21**.

#### OTHER STEWARDSHIP POLICIES TO CONSIDER
1. If church income drops, what expenses will be paid above all else? We might call this a
hip-pocket contingency plan, as many churches used during the Covid-19 pandemic.
2. When an unexpected large gift is received that is not designated (or restricted), do
we repay debt, apply it to savings or something else (by written policy)?
3. What is the written policy on where and how cash reserves are invested?
4. Is there a gift acceptance policy to not accept gifts that are encumbered with a tax lien or debt? Who does due diligence to check donated property prior to acceptance?
5. A cash-handling policy for counting and depositing cash. This should include rotating
teams and regular reviews to spot irregularities and a weekly bank deposit policy.
6. Who is authorized to initiate a disbursement, who writes the check and who signs it?
7. Ensure that a team, not just one person, is responsible for reviewing church financial
transactions.
8. A pastor’s discretionary fund policy.<sup>2</sup>
9. Church Safe combination or lock policy and list of those with the combo or keys.
10. Written procedures to report possible fraud and embezzlement.


Ministries handle money in the normal course of business, from buying pizza for a youth
gathering to writing a check to pay someone’s utility bill, apartment rent or car repairs. Having written policies and procedures will protect not only your resources but also the staff member or volunteer who is following written guidelines.

#### Mailbox Theft – A True Story
After sending out mid-year giving receipts, several church members contacted the finance office to advise that some of their gifts were missing from their giving statement. The missing gifts were either automated deposits either mailed by their banks through bill-pay or hand-written personal checks. In response, the church performed an internal audit. No abnormalities were found. They hired a private investigator who mounted a hidden camera near the mailbox. Early one morning before sunrise, a very petite individual was seen driving up to the mailbox, inserting their arm into the narrow mailbox slot and retrieving numerous envelopes. The video was given to local law enforcement, who arrested the suspect and obtained a search warrant. Police found a number of uncashed checks along with statements to various banks where the suspect deposited stolen checks over several months. To restore stolen funds, banks that had mailed gifts to the church “guaranteed delivery” and made good on the missing deposits. Other money was recovered from the suspect that covered most of the stolen funds. Lesson learned: Monitor possible points of theft with active cameras.  
  
Policies and procedures for financial integrity and transparency can be found at: <a href="https://www.ecfa.org" target="_blank">www.ECFA.org</a> and in the book <u>**Integrity at Stake: Safeguarding Your Church’s Honor**</u> by Rollie Dimos, published January 2014 available at <a href="https://www.amazon.com/Integrity-Stake-Safeguarding-Churchs-Honor/dp/0996107606/" target="_blank">Amazon.com</a>.

<hr style="margin-top:6em; margin-bottom:6px" />
<cite style="font-size:12px">
<sup>1</sup> Appears originally as:
- Busby, D. and Pearson, J. (2019) Lesson 30, “7 Ways to Avoid a Financial Train Wreck: Financial derailment of a church is usually a collective failure, but the finger almost always points back to the governing board.” Available online here: <a href="https://www.ecfa.church/Content/7-Ways-to-Avoid-a-Financial-Train-Wreck-LessonsChurch" target="_blank">https://www.ecfa.church/Content/7-Ways-to-Avoid-a-Financial-Train-Wreck-LessonsChurch</a>
- From the book, Lessons From the Church Boardroom: 40 Insights for Exceptional Governance (2nd Edition), by Dan Busby and John Pearson (2019) - Order from Amazon: <a href="https://amzn.to/2Xc23Un" target="_blank">https://amzn.to/2Xc23Un</a>
- You might also appreciate the guest blog on this lesson by Bob Fry:  <a href="https://churchboardroom.blogspot.com/2019/09/lesson-30-7-ways-to-avoid-financial.html" target="_blank">https://churchboardroom.blogspot.com/2019/09/lesson-30-7-ways-to-avoid-financial.html</a>  


<sup>2</sup> Marden, B. (2019) 7 Policies Every Church Needs for Trust and Transparency, originally published on Feb. 27, 2019. Accessed on February 28, 2023 through <a href="https://www.churchleadership.com/leading-ideas/7-policies-every-church-needs-for-trust-and-transparency" target="_blank">https://www.churchleadership.com/leading-ideas/7-policies-every-church-needs-for-trust-and-transparency</a>
</cite>

Some practical and reasonable financial policies for church governance and transparency.

Model What You Preach and Teach

1. Take average cash flow after expenses divided by projected debt service. This is the net sum or another way to say it is annual budget surplus. Ex. $100K divided by $75K (future annual payments). This is 1.25 which is the minimum magic number for approval.

2. Projected debt service to giving units (families - single or full household). The smaller required giving from each household to service the debt, the better. $1,500 or less is best.

3. Number of giving units. Having more households spreads out the financial risk which is a good thing.

4. Revenue to giving units. The best score is having an average household (giving unit) giving of at least $2,000 per year.

5. Average years senior pastor has served at the church? Greater than 15 years, greater than 10, greater than 5 or less than 3 years. The longer the better.

6. Loan to value. The loan amount divided by the overall value of all property. Example: If property is worth $1 million and the loan can be up to $750,000 or 75% would be the highest score.

7. Fund raising collections history: Percentage of pledges that are fulfilled as a dollar amount, not a number of people amount. Example, if $100K was pledged and $90K came in, that would be 90% fulfillment rate.

8. Term debt repayment capability. This looks at how long it will take to repay the debt. Most churches have a 15 to 20-year repayment schedule as the norm. If you can repay the loan in full in 7 years or less, that would give the maximum score for the determination matrix.

9. Historical cash flow coverage. This means, “What was your cash flow coverage over the past 3 years?” “Coverage” means how much of the time over the past 3 years of income would the entire building payment been fully paid out of regular cash flow. The ideal is to show 25% more cash flow each year than what would have been required to make for the building payment.

10. Projected cash flow and projected debt service. (Future increased church income vs. the budget). This is often difficult to know. This would apply if certain line items will no longer be in the future budget (such as paying off a previous note) to allocate to the future payment. Just like #9, banks prefer to see 25% more cash available each year than what is required for the mortgage.

11. Debt service as a percentage of revenue. Less than 10% of total revenue going to the building payment is outstanding. 

<p>
<strong><a href="https://maximizingstewardship.net/resources/Maximizing%20Stewardship%20%7C%20Bank%20Loan%20Standards.pdf" target="_blank">See Page 3 of this document for the Church Risk Matrix.</a></strong>
</p>

#### **Maximizing Stewardship's opinion:**
Biblical references to being in debt are often shown in a negative light, therefore, we are not big fans of borrowing. Plan to borrow as little as possible and repay it as soon as possible. Don’t put God to the test to bail you out with a negative net-worth property loan to asset ratio.


This resource lists the criteria a bank or lender will consider when your church applies for a loan.

How Banks Measure Financial Health of a Church Requesting a Loan

<div style="text-align:center">
<h4>“Trust is important, but trust is not an effective internal control.”</h4>
</div>

Longevity is no assurance that someone won’t be tempted to violate your trust.
<br />
### What to Do After Fraud or Embezzlement is Suspected

1. A decision should be made sooner rather than later whether to bring in outside help
vs. handling the problem internally.

2. Consider immediately securing the office and computer of the potential offender, not allowing them to clean out their office prior to being escorted off the property.

3. When to hire an attorney? (All of the listed scenarios in the quiz are cases where an
attorney may need to be consulted.) <br />
<a href="https://www.churchlawandtax.com/stay-legal/liability/do-we-know-when-to-hire-an-attorney" target="_blank">Church Law & Tax - Do We Know When to Hire an Attorney?</a>

4. If fraud is suspected, instead of terminating the employee, it was suggested they be suspended, tell them what you suspect and then issue a “preserve evidence” order. The church needs to preserve some things without changes such as electronic media. If the person has a computer, they're not supposed to touch it.

5. You may need to check with vendors directly when fraud is suspected to compare original documents with those turned in by the suspect employee.

6. If you report fraudulent activity to your insurance company, they may require legal
authorities to be brought in.

7. You might consider hiring a fraud investigator in addition to the attorney. Another
possible professional to contact could be a forensic document examiner. Just because all documents appear to be original and authentic doesn’t mean they are. PDF documents can be altered.

8. You may need to hire a crisis public relations firm to advise of what you can and cannot say publicly or even to your staff. Also, they can help handle fallout.


<br />
### Internal Controls

What internal controls are in place to ensure someone is not accepting personal
reimbursements for things already paid with church credit cards?

What verification is made when someone charges a ministry trip to ensure the trip was in fact taken? Who looks over receipts prior to reimbursement? Who looks over credit card statements with vendor receipt documentation?

Are there internal controls which prevent bypassing required signatures and the normal approval processes? Is accounting and finance aware that every rule applies to every transaction and every person, or what exceptions are permitted in writing? When fraud comes to light, those associated or connected to the perpetrator may find themselves being interviewed by the district attorney. Basically, you are presumed guilty instead of innocent. Authorities will assume you were in collusion in order for something like this to happen. 

**How strong is your written code of conduct? How well is it monitored?**

Are all your accounting policies and procedures written? Just because things have always been a certain way doesn’t mean they should continue that way. A healthy culture is written, communicated, understood and modeled by every leader.

A healthy accounting system uses one chart of accounts that every department uses, rather than multiple accounts, where information could be hidden. Try to avoid an overabundance of line-by-line information and create one-page reports that show trends. However, to arrive at this document, the entire staff needs to go over transactions line-by-line with supervisors.

**It doesn't matter how many internal controls you have if you don't have an effective
manager overseeing those controls.** If you don't have transparency, there's no way for controls to have any impact.

Allow everyone to ask questions in order to drill down with your accounting system to the very core level. In this way, if anything is seen that even remotely looks out of control or odd, it can be reviewed.

Consider using bank software that controls credit card usage and discontinue using
American Express (without credit limits).

Discontinue personal reimbursements because purchases can be returned without the church receiving credit (and instead be swapped for personal use).

Train staff to understand and comply with credit card policies and have your system set up to control limits on each issued card.

Financial staff should be transparent and serve as managers performing duties as managers. 

Trust is important, but trust is not an effective internal control. **People let these things build up. Good stewards utilize what is there by paying close attention.**

Managers should have an open door and try not to skirt an issue. Let staff know you aren’t trying to hide anything. Give them permission to drill down to the to the nth degree if needed.

<strong><u>Matthew 24:43</u></strong> “But understand this, if the owner of the house had known at what time of night the thief was coming, he would have kept watch and would have not let his house be broken into.”
<br />
### Q&A's

<u>Consider switching from personal reimbursements to one church credit card account</u> with individually controlled cards. Historically, people would use their personal cards and get reimbursements. A cohesive policy should cover the entire organization. A recommended practice would be to change to a bank with a credit card program with controls at a granular level.

As an example, nobody may buy liquor or pay for gambling with the credit card. Merchant codes for these types of vendors can be turned off. Have a way to see that any expense is legitimate. Then, there is no worry about whether a receipt is real because it comes through the dashboard to the person who controls income.
<br />
<h4>Credit Card Transactions</h4>

Even with a document showing how much each type of person can spend, credit card
purchases can bypass the limitations if there are no controls set on the credit card. With the new system, an admin card can be limited to a $300 purchase. They can make one single transaction. If they need more, then their supervisor has to send an email request and it can be change for a 24-hour or 48-hour period. Then it automatically reverts to the previous approved level.

Consider setting up credit card transactions to report directly to your expense reporting system app which flows directly into the accounting system. Using <a href="https://www.sageintacct.com/" target="_blank">Sage Intacct</a>, you can drill all the way back down to the receipt level from their credit card.

With an online portal, spending profiles can be setup and people assigned to different
spending profiles with varying levels of what they can spend. As examples, amount might be higher for an executive level pastor. Ministers and directors might have a mid-level limit for spending.

Consider a bank that provides a cash refund at year’s end which is better than reward points that are more difficult to spend.
<br />
<h4>Church accounting Systems</h4>

_We are not endorsing any specific businesses or services. We are simply reporting the experience of an end user during 2020._ Sage Intacct saved one church about 30% on the cost of an audit each year because of electronic age capabilities with all the different documents and everything they need. They have full access to it. No documents have to be pulled. No need to keep any hard copies, everything is literally right there.
<br />
<h4>Trust but Verify</h4>

**Everyone wins with more transparency.** Supervisors need to look through financials of those who they oversee to include types of expenditures as well as dollar amounts over time.

Another recommended process is **ensuring other organizations your church supports are receiving your donations.** Also, when people are funded to take a mission trip, who verifies each person took the trip?
<br />
<h4>More Internal Controls</h4>

Some ministry accounts grow around those who take a job or add a ministry. How can we better confirm what is turned in and combine these into one general ledger? People are personally hurt when changes are made from the way they began. We need to stay current with tax law and technology. “Given in time, either the job leaves you, or you leave the job.”

** _Our job is not to worry about whether we're trustworthy. Our position is to wonder if the next people are trustworthy - John Allison._ **

<h4>People don’t like to be the enforcer in ministry</h4>

It may sound crazy, but changes and processes are not really for the present worker. It’s for the next person, so when the controls are left to their successor, it’s going to be in good hands.

If someone can’t locate a receipt, you have got to be a little mean. Nobody should get
away with it. Also, Positive Pay on all checks keeps someone from duplicating a check they receive.

When a situation with an employee comes up, a better plan is to suspend them, saying, “You need to go home. You're suspended with pay.” Immediately lock everything down including passwords, their computer and their workspace. That gives you time to take a breath to try to figure everything out. Make a call to your church’s attorney and follow their advice.

You need written procedures. If your senior pastor is a good leader, they will agree to abide by those procedures because it protects them and their church at the same time.

Having written procedures are important to protect staff as well as the church. This is our way of making sure that no one can consider you at fault because **we have every receipt. We have every document. We can track everything, and we can see where everything is.**

_A special shout out to the director of finance of a church who provided this information to share but asked to remain anonymous._

What to do if you suspect fraud or embezzlement. Also some suggested internal controls or policies to guard against fraud.

Tag: church governance

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