Building Cash Reserves

Creating financial strength for times of uncertainty.

During the Great Recession that began to affect the U.S. economy so severely in late 2008, churches with little or no cash reserves felt the most immediate, severe effects. In fact, many churches that had significant debt outstanding and that had little or no cash reserves found themselves in immediate financial peril. A significant number of churches were unable to pay their debt obligations and lost their church facilities in foreclosure or its equivalent. Failure to honor a debt obligation certainly presents scriptural challenges for any church leader.

Philosophy of cash reserves

Some churches do not maintain cash reserves. This is a respectable philosophy, and what follows isn’t meant to denigrate such an approach. However, many churches believe it is appropriate to maintain reasonable, appropriate, and healthy cash reserves and financial position, and this article is designed to help them.

From a practical perspective, any number of unexpected developments can occur that could present cash flow challenges to a church. For example, if a well-respected leader left the church, or committed some discreditable act, then attendance and financial support of the church could significantly and immediately suffer. A sudden downturn in the economy like the one in 2008, brought on by the outbreak of war, a stock market collapse, or other unpredictable event, could cause similar impact.

Part of effective stewardship involves having a viable and stable ministry. If church leaders are frequently focused on addressing cash flow challenges or related concerns, they will focus less on their ministry objectives.

References to “cash reserves” herein refer not only to cash maintained in bank and similar accounts but also to investments in liquid marketable securities that may be readily converted to cash.

Philosophy of debt

Whether it is permissible or advisable for a church to enter into a debt obligation can also be a matter on which churches have different philosophies—often based on Scripture. Many churches enter into debt obligations, considering it permissible to do so, as long as the church carefully and wisely plans for the ability to honor its debt obligations. Again, this article is designed to help such churches. Some churches believe they should not incur debt obligations, and the references to debt and its management herein are not intended to disrespect their positions.

For churches with significant outstanding debt, healthy cash reserves and financial position are essential in supporting the church’s ability to honor its debt obligations. A church with the philosophy of maintaining no significant cash reserves should not incur significant debt obligations.

Cash flow

A church that intends to maintain a healthy financial position cannot, by definition, do so without cash flow surpluses. Many church leaders express their desire to maintain healthy cash reserves and financial position, but then operate in a manner that doesn’t support that objective. For example, if a church spends all of its cash revenue each year, that church cannot improve its liquidity or cash reserves no matter how much its leaders may say they want to.

Improving a church’s liquidity and cash reserves requires intentional effort as an essential part of the planning and budgeting process. That effort must include planning to spend less than what the church receives in cash revenues. For a church that has been following the habit of spending all of its cash receipts annually, the transition can be challenging. If the church’s revenues are growing, the church may be able to make progress in this area by slowing or stopping spending increases as revenues rise. For churches whose revenues are not growing significantly, the transition will require pursuing additional revenue (through additional giving or from alternative revenue sources), employing expense reductions, or applying a combination of the two.

Reaching a desired financial position

While positive cash flows and surpluses have merit, pursuing them should be part of a broader, but specific plan. The church should have specific, targeted objectives for achieving a desired financial condition, as well as a timeframe for doing so. The combination of a specific, targeted financial position and a timeframe provides a roadmap for the church’s leaders in planning and budgeting. Building a cash reserve should be one of these specific objectives.

Once the church is philosophically on board with maintaining reasonable cash reserves and improved financial position, and has determined that it is willing to take the steps to achieve those objectives, the next step is to define what the church considers to be appropriate cash reserves and a desired financial condition. The church should have specific target amounts.

For a church that is a long way from achieving its objectives, it is wise not to attempt to get from “Point A” to “Point B” overnight. Depending on the circumstances, the process of reaching the church’s targets may take a number of years.

For example, the church may establish that its target for cash reserves is six months of cash operating expenses.

Once the financial position targets are defined, the church should establish what it considers to be a reasonable timeframe for achieving the objectives. For a church that is a long way from achieving its objectives, it is wise not to attempt to get from “Point A” to “Point B” overnight. Depending on the circumstances, the process of reaching the church’s targets may take a number of years. If the church believes its journey from Point A to Point B will be long-term, it is important for the church to establish annual benchmarks or milestones (interim targets) to facilitate the monitoring and assessment of progress.

Assume the church has one month’s cash operating expenses as a cash reserve and it plans to achieve a six-month reserve. Assume the church decides to achieve its target over a five-year period, by increasing the reserve by one month’s operating expenses each year. So, the church establishes milestones for the end of each year accordingly. At the end of Year One, the church should have two months of operating expenses in its cash reserves. At the end of Year Two, it should have three months, and so on, until the end of Year Five, when it should have six months of operating expenses in reserves, assuming the church has been able to follow its plan.

Recommended objectives

Church leaders may desire to improve their financial position and liquidity and to establish appropriate targets, but they may not have a sense for what the targets should be. What constitutes “reasonable” cash reserves and “sound” financial position?

The following recommendations, based on professional experience and conversations with other financial professionals, are general in nature and may not be appropriate for some churches, depending on the individual facts and circumstances. Each church should obtain counsel from advisors with significant professional financial experience to establish its individual targets and objectives.

Baseline refers to a level that represents the minimum position for establishing healthy liquidity and financial position.

Strong refers to a level where financial position and liquidity should be more than adequate in most circumstances.

The term “cash” as it relates to reserves and balances is intended to include liquid marketable investment securities.

Operating cash reserves

(Note: The recommended levels are based on the assumption that the church already maintains cash, including liquid marketable securities, adequate to cover all donor-restricted and designated net assets. Recommended reserves and balances are levels in excess of the amounts required to cover such items.)

Baseline: Three months of operating cash expenses plus current liabilities

Strong: At least six months of operating cash expenses plus current liabilities

Debt service reserves (for churches with mortgages or other long-term debt)

Baseline: Six months of debt service costs (principal and interest payments)

Strong: At least one year of debt service costs

(Note: If a lender requires maintenance of minimum debt service reserves, the actual use of the lender-required reserves will typically create an event of default on the loan if the use of the funds causes the reserve balance to decrease below the required minimum. Accordingly, the church should maintain debt service reserves above and beyond the level required by a lender if the church wishes to be able to use the funds without defaulting on the loan. See below for more information about debt service reserves.)

A Special Word about the Importance of Cash Reserves for Debt Service

A church that is building or acquiring new property using debt financing typically puts significant cash equity into the property to reduce the amount of debt needed and to establish an appropriate loan-to-value ratio. While having substantial equity in its real estate is an advantage, in the opinion of the author, maintaining an adequate debt service reserve is a higher priority than increasing equity in the real estate. In other words, it may be more advantageous to put less cash equity into a property in order to maintain an adequate cash reserve for debt service, assuming that the resulting loan-to-value ratio is appropriate. An adequate debt service reserve can provide much-needed flexibility and can assist in continuing to make debt payments in the event of an unexpected adverse financial development. Equity in the property does not offer this advantage.

In summary, healthy cash reserves and debt service reserves are an important part of responsible church stewardship. Church leaders should establish appropriate targets for their church’s liquidity and financial position and develop a viable plan for achieving the targets. Depending on how far a church is from its targets, the process of achieving them can be a multi-year journey. In the end, it will be a worthwhile journey to a financially healthier church.

Michael E. Batts is managing partner of Batts Morrison Wales & Lee (, a CPA firm exclusively serving churches and nonprofit organizations across the United States from multiple offices. Mike is an Editorial Advisor for CHURCH FINANCES. He served as chairman of the Commission on Accountability and Policy for Religious Organizations advising U.S. Senator Charles Grassley on federal policy matters affecting religious organizations.

This excerpt has been adapted from the book, Church Finance, by Michael E. Batts and Richard R. Hammar. This book is available for purchase at

Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.
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