Why is it important for churches to monitor debt ratios and measurements?
First of all, your lender will monitor them even if you aren’t. Keep in mind that many loan covenants are based on the results of key debt ratios. If you violate one, there may be penalties and, in extreme circumstances, the lender may even call your loan—requiring you to refinance or pay off the remaining balance. Most importantly, you will strain the relationship with your lender.
There are six debt ratios and measurements you can use to monitor your church’s dependence on debt levels and identify any needed adjustments. These represent important indicators every church should understand and monitor.
1. Debt to Unrestricted Contributions
The ratio of "Total Debt" to "Unrestricted Contributions"
This ratio measures how many times your debt is greater than annual unrestricted gifts. Lenders expect debt to be funded through unrestricted contributions. They determine what debt load a church will be able to handle on top of other required expenditures (salaries, benefits, facility expenses, mission expenses, and so on).
The lower the ratio, the less the debt will strain the church’s budget. A ratio that is too high indicates your church’s debt levels are placing an excessive burden on the budget. It also indicates your debt may be at a level that lenders consider too great for your church to support.
2. Current Ratio
The ratio of "Current Assets" to "Current Liabilities"