If your church goes through several months of low giving, will you be able to keep your doors open?
A church without necessary reserves will be scrambling to operate in the short term, no matter what the other balances are. Positive net income and net asset balances won't make up for inadequate cash reserves or help in months when giving is down.
Fortunately, there are five cash flow ratios and measurements you can use to monitor your church's reserves and identify any necessary adjustments. These represent important indicators every church should understand.
1. Days of Expendable Net Asset Reserves
Unrestricted Undesignated Net Assets + Board-designated Net Assets for Operations
Cash Expenses (Total Expenses - Depreciation)
There are three cash flow ratios you can use to calculate how many "days" of cash reserves your church has, using different perspectives from the financial statements. To calculate how many day of reserves you have, multiply the ratio above by 365.
The first ratio tells how many days of operating expenses are available in net asset reserves. It takes into account the accrual of current assets and current liabilities. Keep in mind that the term "expendable net assets" represents the total resources available to spend on operations, excluding future gifts made or revenues generated by the church. It's similar to a savings account.
Expendable net assets consist of unrestricted, undesignated net assets, which are net assets that result from achieving positive net income from all sources of revenues (excluding restricted revenues). It also includes amounts designated by the board for operating purposes other than capital expenditures. You divide this total by the amount of cash expenses to find your net asset reserves. Since all of these ratios measure cash flow, we use the term "cash expenses." These are total expenses less deprecation, the most significant non-cash expense recorded.