Cash reserves are often measured in terms of months of operating cash based on the month-end when cash is generally at its lowest point for the year. One mistake churches make is measuring the months of cash they have based on their year-end cash balance. If their year-end is December 31, this could be the highest cash point in the year—compared to August 31, which might be the lowest cash point in the year.
Measuring cash balances at the lowest point tells the church whether their balances are adequate or not at the low point.
When a church is at a high cash point, there is little connection to how much cash it needs at the lowest point. The church’s measurement of cash reserves will be way off.
Churches often calculate monthly reserves by taking their yearly budget and dividing by 12. If the operating (unrestricted) budget of a church is $1.2 million, one month’s budget is $100,000. If the church has cash, cash equivalents, and other liquid investments of $300,000, with none of this cash relating to restricted net assets, it has three months of cash reserves. (Caution: An amount equal to the total of unexpended restricted gifts should be subtracted from total cash reserves before calculating the number of months of cash available for operations. It may also be appropriate to exclude an amount equal to debt payment reserves required by a financial institution.)
I often hear church leaders say that six months of cash reserves is a good target for a church. But according to a recent Evangelical Council for Financial Accountability (ECFA) survey, that doesn’t often pan out. While 40 percent of ECFA-certified churches said they would like to have six months of cash reserves, only 12 percent had that much in reserves.
Most of the churches surveyed had two months of cash reserves. (As for how much of the budget goes for cash reserves, Church Law & Tax’s “2014 Church Budget Priorities Study” found that on average, churches put 2 percent of their budget toward cash reserves.)
This issue cannot be solved by applying a formula—it is more complex. I recommend that churches decide what amount works best based on two factors: reserve philosophy and unique financial situation.
Adapted from "Evaluating Your Church’s Cash Reserves" by Dan Busby, SkillBuilders July/August 2016. Church Finance Todaycovers new developments, trends, and upcoming tax deadlines for treasurers. In addition, subscribers also receive complimentary access to SkillBuilders, a bi-monthly two-page PDF supplement. SkillBuilders are designed to walk through key financial management skills and provide tips and insights essential to the ongoing financial leadership of a church.
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