Ken Philip, a financial crisis management consultant at Ark Builders, specializes in the turnaround of troubled churches and religious organizations. We asked him how churches get themselves into financial trouble, and how they can get out of it.
How do churches get themselves in financial trouble?
They get into trouble in two ways. First, they don’t have an operational or financial plan. And the second way is by not creating good management reporting systems to monitor their operational and financial plans.
Should churches in trouble ever file bankruptcy?
They should almost never file–there could be a compelling reason that they need to. Maybe fraud. But bankruptcy doesn’t work well for a lot of organizations. It can become very litigious, and it often takes a lot of money to get through it. Even if you’re a $50 million or $100 million company, you might not be able to survive bankruptcy because it takes too much time and money.
What do you recommend instead of filing bankruptcy?
Out-of-court arrangements–a negotiated arrangement where when you get stakeholders together (lender(s), church governance/leaders, others with a “stake” in the outcome) and you get agreement to a turnaround plan. In order to make such an arrangement you have to know what the problem is. And then you craft a solution and you bring it to your members and everyone needs to get on board.
If you can’t do an out-of-court arrangement, you have a receivership option. A receivership is monitored by the court, but there aren’t the kinds of rules that apply in bankruptcy. It’s subject to a more commercially reasonable, common-sense solution, so you can get things done quickly and more efficiently. In my view, the ideal solution is to resolve any issue out of court. But if you can’t do that, use a receivership vehicle.
As a technical matter, most receiverships are state receiverships. Most states have a receivership statute. Those statutes are generally fairly simple. A receiver is responsible for developing a plan and putting that plan in front of a court and seeking the court’s approval. Such a plan is most often developed in concert with all stakeholders.
Let’s say a church believes its getting close to bankruptcy–it is one or two months out from being in huge trouble. What are the top things a church in trouble needs to do?
The very first thing you should do when you see a financial problem is to do something. The natural human tendency is to avoid things and think it’ll get better. People must face the facts.
Second, the church needs to engage an expert in these types of financial and operational situations. No matter how good its staff is, they aren’t experts in managing the issues related to turnaround and crisis situations. For the most part, the skills or abilities needed don’t exist in a church. This is especially true because financial problems are most often a symptom of a larger problem.
If a church came to me and said, “I think I’m in trouble,” I’d take these steps:
- First, I would figure out how serious the problem is. Are you running out of money tomorrow? Or are you in an earlier stage?
- I would then do an assessment of the organization. An operational and financial assessment figures out where exactly the problems are in the finances and in the ministries.
- Finally, I’d provide a (written and oral) report. This report details the problems as determined in the financial and operational assessment and recommends a going-forward (turnaround) plan.
- Since each church’s situation is unique, it really does need a consultant to come in and see where its revenue and ministries got imbalanced. You have to figure out the real problem.
- For example, take this hypothetical scenario:
- A church (2,000 attendees) has a big new building that it built, and it has a mortgage of $5 million or $10 million. But something happens where the church can’t make payments on that mortgage for whatever reason. You have to figure out the problem. Was the building too large? Did it start ministries that are costing too much money? And then develop a solution. Maybe the church needs to stop certain ministries. Maybe it needs to say to its mortgage company, “We need to lower our payment.”
- If a church gets into trouble because it can’t pay its mortgage, there’s no advantage to the mortgage company to see the church go into bankruptcy or receivership. If you’re the church, you want to develop a plan that will be successful. So you go to the debt holder and you make an arrangement, an accommodation, to help work out this problem.
- Are mortgage companies willing to work with a church in this way?
- Most are, some aren’t. But if it is faced with a situation where your church is going to go dark and the mortgage company is going to have an empty building it can’t sell, or your church is threatening to file bankruptcy, and the money you would be paying the mortgage company is now going to legal fees and attorneys, the company would rather work with you.
