Cash Management


Cash is whatever is available in the checking account to pay bills, but there may be cash in other accounts too.  “Cash” is anything that could be easily added to the checking account in less than a week.  A CD at the bank can be broken, for example, and the funds added to the checking account.  Stocks and bonds can be sold.  These are not actions one might wish to take, but they can be accomplished easily and by doing so one can boost the checking account in a few days.  So, those are all forms of “cash”.

Some congregations have a few people who worry there is not enough cash on hand;  in other congregations many people worry there is not enough.  In part this is a function of personality as much as it is of cash levels.  We have different tolerance levels for the possibility of running short “if something happens”.

The church Finance Committee needs to worry about cash sufficiency.  There are two distinct ways to not have enough cash.  First, a congregation may not have enough money on hand to meet its obligations, such as payroll, as they come due.  This doesn’t mean the church is bankrupt.  Rather, it means that whatever the church has in the way of property or assets at that time is not cash, not spendable.  The congregation might own the buildings and property outright, but not have any cash with which to pay bills.

The second way a congregation can be short on cash is more indirect and stealth-like.  Suppose the congregation has reserve accounts totaling $100,000 but has cash totaling $60,000.  It is true that the congregation is not in the same situation as the prior example; bills can be paid.  Yet most would agree that the cash situation is not healthy.  For some reason the congregation has been borrowing, in effect, from the reserve accounts to meet current budget needs.  There is nothing immoral and unhealthy in doing so, as long as the need is distinctly temporary, minor, and known.  This example is probably “none of the above”.  It is a situation that needs to be corrected, even though it does not present an emergency (as long as the reasons for holding reserves don’t all manifest at the same time).

Let’s discuss these situations as cases of the risk each presents.  Consideration of risks is best done by isolating the causes.  There three archetypes:  the Working Capital Risk, the Contingency Risk, and the Nightmare Risk.

Working Capital Risk:  The congregation has uneven cash flow.  At some point(s) during the year more is going out than is coming in.  A few months of that could happen even though the church is financially healthy in all other respects.  There is simply a temporary negative cash flow.  It is anticipated, can be planned for, and controlled or eliminated.

Working Capital Risk is easiest to quantify.  To do so, go through the financial reports for three (or more) years looking at every month in the period.  Calculate the difference between the cash that came in each month and the cash that went out.  Then, find the average change in cash level for the three Januarys, Februarys, etc.

Starting with the month your fiscal year starts add those averages together cumulatively in monthly order – July, July plus August, July plus August plus September, and so on for at least a twenty-four month period.  (Start with zero.)  You can graph these results if you wish for a visual understanding.  This will tell you how far you might get in the hole with the cash flow as it usually presents itself in your church.  And, you can see that Working Capital Risk is normal.

The biggest negative number you get to identifies your worst month for Working Capital Risk.  Suppose it is -$5,000 in September.  With that in mind, you know that it is best to have at least $5,000 in cash beyond the need to cover reserves as of the start of the fiscal year.  If you have had temporary cash problems of this sort they can be eliminated over a couple years by reducing spending to increase cash.  This would make future borrowing from the reserve accounts unlikely.

Contingency Risk:  There are emergencies.  Vandals bust a large picture window, for example.  Termites are discovered to have eaten away a major section of the floor joists.  The furnace stops working on Thanksgiving weekend.  Risks of this sort face us all – the unexpected and sudden need to pay for something that represents a relatively large drain on our resources.  Such events are likely to manifest, but we do not know when.  Odds are good a church will experience Contingency Risk at least once in a five year period; such events are a virtual certainty in a ten year period.

Some churches have a Contingency or Emergency Fund for such occasions.  Whatever the name, this is the risk being covered.  And, it is a good idea to isolate the money saved for such emergencies in a separate reserve account.  The congregation should be able to see it on the balance sheet.

How much should a congregation keep on hand in the Contingency Fund?  There is not as clear a way to quantify this risk — and judgment rules.  My own risk tolerance tells me 5% of the annual operating budget is sufficient.  I would not go to the mat if some of the Board members felt 10% was more realistic.  ( I might argue with them about the meaning of “realistic” when discussing risk; but, I would leave it at that.)

If one of the Board members argued, however, that an amount more than 25% of the annual budget, or “as much as we can possibly save” should be parked in a Contingency Fund I would curse and holler.  My sense of congregational purpose tells me people do not give money to their church to protect against remote risks.  Churches are called to do more important things in the world than sit on a big bank account.

If a congregation has a sufficiently large Contingency/Emergency Reserve and if all the reserve accounts are covered by available Cash, there is very little need to save any surpluses generated each year as budget savings.  Such funds should be used to carry forth the ministry.

Nightmare Risk:  A financial nightmare may occur.  I do not mean the difficulty we face every year in putting a responsible budget together.  I mean instead an unforeseen shortage that will continue for several months, or several years.  Suppose, for example, there is a congregational fissure and one-quarter of the members leave to form another congregation.  Or, a windstorm causes major damage to your building.  Or, global warming causes the oceans to rise 20 feet worldwide.  Or, the water supply in ten major U.S. cities is ruined in terrorist attacks and millions die.

Many, many things could happen to cause financial nightmare for your congregation.  Even if taken together they have a low probability of occurring, perhaps one or two in our lifetime.  If such an event takes place it is disastrous at the time.  But, the risk is not quantifiable.  Further, it requires congregational response on many levels; financial difficulties, as great as they might be, are only part of the problem.

In short, with nightmare scenarios the possibilities are endless; the probabilities are remote; the problems will not be solved with a larger bank account.  There are some who believe in their bones that churches should always budget to have a little left over, and should always add the surplus to savings.  “You never know.”  Frequently our older members who grew up in depression era homes feel this way, and the feelings are understandable. But, rather than submit to an unbounded fear-based worldview, use your available resources to create sufficient working capital and a solid contingency fund.  Then, create a vibrant congregation and a just world in this lifetime rather than a healthy bank account.  Your congregation will be better for it.

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