Four Good Questions for Churches about Cash Reserves
Editor's Note: We frequently field questions from churches about cash reserves. A general rule of thumb is for churches to maintain a minimum of three months of cash on hand related to expenses. We recently asked Michael Batts, an Editorial Advisor for ChurchLawAndTax.com and the managing partner for Batts Morrison Wales & Lee, a national CPA firm serving nonprofits and churches, about adequate levels of cash reserves, plus a couple of questions about demonstrating the need for reserves to senior church leadership.
Is it a good idea to have cash reserves?
Generally, yes. Part of good stewardship is planning for the future. Consider the story of Joseph and planning for the famine. And consider that Malachi describes bringing the tithes into the "storehouse."
From an operational perspective, maintaining reasonable cash reserves represents good stewardship by allowing a church to be prepared for contingencies, such as unexpected large repair bills, a sudden and unexpected downturn in revenues, or other unexpected events. For a church with outstanding debt, cash reserves can be critically important in the event of significant unexpected expenses or revenue downturns.
So how much should a church have in cash reserves?
There is no real right answer to that question. Some people suggest three to six months of operating expenses as a rule of thumb. And it's not a bad rule of thumb. For a church with significant long-term debt outstanding, I generally recommend that the church have at least one year's worth of debt payments in reserve. Such a "debt service reserve" can provide the church with critical breathing room in the event of an unexpected cost or revenue downturn. Without a debt service reserve, such an event could cause immediate default. (As a side note, should be cautious about reserves when negotiating bank loans. As a condition of a loan, banks sometimes will require the church to maintain, at all times, a debt reserve fund of a certain minimum amount. While that may seem reasonable at first, the reality is that if a church needs to use the reserve for its intended purpose—making payments during a time of tight cash flow—then spending it down below a required minimum level will become an event of default.)