Does your church track its expense ratios? This can help you identify key trends in the outflow of resources between years. It also provides the opportunity to compare with other churches and check the reasonableness of your expenses. These ratios represent important indicators every church should understand.
1. Personnel and Mandatory Debt Service Payments to Total Expenses (Excluding Depreciation Expenses)
The ratio of “Personnel (Salaries + Benefits)+ Mandatory Debt Service Payments(Principal + Interest Expense)” to “Total Expenses - Depreciation Expense”
The largest expense on the financial statements of most churches is salaries and benefits. This is understandable, as a church is not in the business of selling products or manufacturing items. It provides services performed by individuals, paid and volunteer. Debt service payments—which are a reduction of a liability and not an expense—represent the second largest outlay. Together, these items represent a majority of resource outflows from the local church.
Therefore, it is essential to continually monitor these levels as a percentage of cash expenses. Cash expenses are total expenses less (minus) depreciation, the most significant noncash expense recorded. It is also important to promptly follow up on changes in trends or unusual variances from peers to ensure that your ministry resources are continually maximized.
This ratio, which can be split into two separate pieces, allows your church to look at two of its largest outflows and determine the portion of the operating budget that will be used. Often a growth cycle results in an amount of debt the church anticipates being able to pay off as more people are able and encouraged to attend. However, the church needs to be able to pay the bills and provide the services that will attract new people with the current budget. Reviewing this ratio in advance of any major debt decisions will help you analyze the feasibility of your facility expansion goals.
Reasonable benchmarks for these ratios, both individually as separate pieces and in the aggregate, are reflected in how churches actually spend their money. Those benchmarks are:
· Personnel costs (salaries and benefits) should fall between 40 percent and 55 percent of expenses.
· Mandatory debt service payments, including interest, should be no more than 15 percent of total expenses.
· Total personnel and debt service costs should be no more than 40 percent to 70 percent of total church expenditures.