Church Matters-Solutions

1. Church Matters-Solutions • CMS Leadership Series • Part IV, Financial Management • Other Parts: • Part I, Church Government – History • Part II, Church Government, Constitution and Bylaws • Part III, The Call Process The content of this presentation is common to any congregation, regardless of size, as sound principles and policies are fundamental to financial integrity

2. Introduction • This part consists of three sections, which can be viewed as stand alone in content, but integral to a totalfinancial managementview • Financial Overview • Budget policies and processes • Dealing with housing expenses 2

3. Financial Overview • Where does the basic financial responsibility and trust lie? • The elected officers of your church: the President, Secretary and Treasurer • This is not the congregation’s decision • Your state requires it for non-profit corporations • Loan documentation requires it • It is never the Pastor’s responsibility • The “Fiduciary Responsibility” is exercised “in trust” for the entirecongregation 3

4. Financial Overview • Voters are Responsible for overall financial management and integrity • Money is spent only if available and approved by budget or other authorizing action • Contracts are not made without being authorized and the costs budgeted first • Only designated people are authorized to spend approved funds and in their program areas • Sunday School teacher can’t spend trustee funds, etc. 4

5. Financial Overview • “We are a small congregation, why do we need this?” • No matter your size, principles always apply and the state doesn’t care about size • Careless spending of money withoutaccountability can result in over spending, and general discontent among the congregation • At worst it could be embezzlement 5

6. Financial Overview • Whatever you do should at least be as good as what members do in their own households • Civil law may apply in some areas of administration but not in areas of internal doctrine and religious practice • Example: Breaking the 8th commandment internallyis not a civil matter until it goes outside of the congregationto the public

7. Financial Overview • The primary fiscal function is provided by a properly developed, approved and managedbudget • The Board of Trustees has a similar property management responsibility for the church’s physical property (assets) • Exceptions to the budget are not handled on an ad hoc basis, but rather by prearrangedpolicies and procedures • It doesn’t have to be complicated 7

8. Financial Overview • A church is a “not for profit enterprise,” but it cannot operate for very long in the RED • Net Profit/Loss, listed on the Balance Sheet, is key to your financial health at the end of the year and every officer and voter should know where to find it and know what the number means (a.k.a. Retained Earnings) • Good practice is to have a Finance Committee staffed with a minimum of three people who have some financial background 8

9. ASSETS Balance Sheet Cash on Hand $ -30.00 Checking Cascade Bank $9,111.28 Savings Cascade Bank $ 1.00 Total Current Assets $10,513.77 Other Assets Total Assets $10,513.77 LIABILITIES AND CAPITAL Total Current Liabilities $0 Long-Term Liabilities Total Liabilities $0 Capital - Retained Earnings $5,919.87 Net Income $4,593.90 Total Capital $10,513.77 Total Liabilities & Capital $10,513.77 Un-audited - For Management Purposes Only 9

10. Financial Overview • The Treasurer and bookkeeper are two different functions, having different objectives and outputs • The bookkeeper keeps the books and prints the financial reports • The Treasurer writes the checks and acts as the “Chief Financial Officer” of the congregation • They can be the same person 10

11. Financial Overview • The Financial Secretary is responsible for the receiving and depositing of all monies and may be assisted by the office secretary • Especially if you have a Day School, Pre-School, etc. • Deposit slips from the bank go to the Treasurer/Bookkeeper for recording purposes • This is a critical separation of function and it is called a check and balance • The Treasurer neversubstitutes for the function of Financial Secretary 11

12. Budget Principles • Business software organizes all the accounts and produces the necessary reports for review and editing • The organization of the chart of accounts used in businesses does not lend itself well to managing a church's finances without some modification of titles and groupings • The Voters’ Assembly is the only approving authority for the budget, as well as any changes during the year, unless delegated 12

13. Budget Principles • Each fiscal year requires a new budget, based to a large extent on last year’s budget • The proper name for a budget item is an account or sub-account, having a name and a number • Some accounts will be deleted, added, increased or decreased • Discretionary accounts start with a zero,all board and committee accounts, each year • Non-discretionary accounts reflect obligations • The entire set of account numbers make up the Chart of Accounts 13

14. Acct # Titles • 10000 Petty Cash Cash • 10100 Cash on Hand Cash • 10200 Regular Checking Account Cash • 10300 Payroll Checking Account Cash • 10400 Savings Account Cash • 10500 Special Account Cash • 10600 Investments-Money Market Cash • 10700 Investments-Cert. of Deposit Cash • 23300 401 K Deductions Payable Other Current Liabilities • 23350 Health Insurance Payable Other Current Liabilities • 23400 Federal Payroll Taxes Payable Other Current Liabilities • 23500 FUTA Tax Payable Other Current Liabilities • 23600 State Payroll Taxes Payable Other Current Liabilities • SUTA Tax Payable Other Current Liabilities The beginning of the Chart of Accounts will look something like this 14

15. Creating a New Budget • Income includes all sources of money expected in the coming year. • Don’t over estimate income, be conservative • Expenses are of two types: discretionary and non-discretionary • Always estimate on the high side • Discretionary funds are spent as needed, like by a board, committees, office expenses, etc. • Non-discretionary funds are payroll, contracts, taxes, etc. that you are obliged to always pay 15

16. Creating a New Budget • The chair for each of your boards and committees provides recommendations for budget items for the coming year to fund their activities • These are yourprimaryaccount managers, as they are responsible for carrying out the functions of the congregation • The pastor could make his office budget needs known, other than salary, via the Board of Elders/Deacons, or directly 16

17. Creating a New Budget • Compensation Committee provides recommendations for payroll and other forms of employee compensation • Increases and decreases for coming year • The Treasurer provides input concerning taxes, contracts, health insurance premiums, and other heavy duty items • Break down Payroll Expenses into sub accounts for clarity 17

18. 6100 Payroll 6110 Clergy Salary 6120 Office Staff Salary 6130 Teachers Salary 6140 Employee Overhead 6141 Health Care Costs 6142 Pension Costs 6143 Retirement Costs 6144 FICA Taxes 6145 FUTA Taxes 6146 State Payroll Taxes 18

19. Creating a New Budget • The Finance Committee, chaired by the Treasurer, is responsible for putting the first draft of the budget together, in the agreed format • Includes all expected Income and Expenses • Each significant expense should have its own Chart of Account number or sub account number, in the budget 19

20. Bookkeeper/ Treasurer Finance Comm. Comp. Comm. Acct. Mgrs. Creating a New Budget Annual Budget Preparation Process – Step 1 20

21. Creating a New Budget • The draft budget now goes to the Church Council and/or the Board of Stewardship for preliminary approval • Either one may make recommendations and send it back to the Finance Committee for more work, if need be • When approved by both groups you now have a new draft budget ready to be presented to the Voters for final approval 21

22. Board of Stewardship Church Council Draft Budget Creating a New Budget Annual Budget Preparation Process - Step 2 From Finance Comm. To Voters 22

23. Creating a New Budget • One entity will be responsible for presenting the budget to the Voters in an under-standable format • All those involved in developing and recommending the draft budget to the Voters must support their own recommendations • Changes to the budget can be proposed by any other voter during the Voters’ Assembly, but not by those who created it unless there is new information just now available 23

24. Budget Approval Process • The information presented to the Voters must be complete, but simplified • Allaccounts and sub accounts should be listed with the recommended dollar amount and show the + or – from last year’s value • Accounts should be grouped with headings like: Word and Sacrament, Administration and Maintenance, Education and Internal Evangelism, Missions and Outreach • Larger churches, with schools, etc. will need more groupings 24

25. Budget Approval Process • Voting on a new budget should not be a contentious or a difficult process • Avoid any communication problems by getting the word out on the the budget early • Some churches put out the budget at least 30 days in advance so people can read it, ask questions, before the Voters’ Assembly • A simple majority, unless otherwise prescribed, is needed to pass the budget 25

26. Budget Approval Process • Once approved, the budget is the only valid method to authorize spending the congregation’s money during that year • The approvedbudget should always show a small surplus or be balanced • Do not have a loss in two successive budget years • It should never be approved with a projected loss, or “phantom income,” for the coming budget year 26

27. Managing the Budget Budget Management Process Budget change requests from Acct. Managers Requests Church Council Above limits needs Voter approval Approvals Adjustments - (per Voters’ Assembly dollar Limits) 27

28. Draft Budget Voters’ Assembly Approved Budget • Initial • Modified Requests Church Council Managing the Budget Annual Budget Change Process From slide 15 Budget Change Process – (above council approval dollar limit) From slide 27 28

29. Managing the Budget • Each month the Treasurer will produce reports to the Church Council showing the actual Income to Expenses to budget, an Income Statement and a Balance Sheet, at a minimum • The reports will also show asset accounts, such as how much is in the checking account, savings, restricted funds, etc. • Restricted funds can only be spent for their intended purpose, no other, and are not available to cover shortages in other accounts unless the donoror trustee agrees 29

30. Managing the Budget • The Voterscandelegate to the council the ability to move money from one expense account to another to make budgetadjustments, as long as the budget is not increased • An upper dollar limit per expense account should be established by Voter policy • The number of times per year the council can do this should also be established by Voter policy (See Ref 2, page 19) 30

31. Managing the Budget • Voters can delegate to the Council the ability to increase an expense by some % or $ value, if there are Income funds to cover it (budget income is higher, etc.) • Any needed budgetadjustments that exceed the delegated amounts will require the Voters to approve an adjusted budget • Once approved that becomes the new budget for the remainder of the year 31

32. Managing the Budget • Each congregation has a uniqueincome and spending cycle and everyone in leadership should be familiar with it • If you have a day school or day care, etc., it will be very different than a congregation that doesn’t • Look at income and expenses at the end of the first six months • If it looks like things may not work out, you need to do something now, not later 32

33. Housing Allowances • There is a proper way to compute the housing allowance for a called church worker • Allowances for housing costs must be based on local housing costs and be realistic. • Applies only to workers on the roster who are called and self-employed by IRS definition • Not eligible for a housing allowance • Contracted church workers, or office staff • If a parsonage or teacherage is provided 33

34. Thank you! • Church Matters-Solutions thanks you for the opportunity to share with you this important information for the benefit of the laity.