When looking at your church’s bookkeeping, payroll, and bill pay systems, here are some key questions to consider.
The Seven Elements of a Church Financial Operating System
Every church has a financial operating system of some kind, whether they define it or not. It consists of the church accounting systems they employ to organize, manage, and try to make informed decisions based on their information.
From our years of experience working with churches—start-ups, fast-growing, and established—we have found that there are seven components every church needs to have a healthy and thriving financial operating system.
Churches that are weak in any, or all, of these components, are often most vulnerable to money mismanagement, cash flow emergencies, and even fraud.
Before we get into the three key elements our bookkeeping and accounting pros believe every church should re-evaluate today, here are all seven:
- Book Reconciliation, aka Bookkeeping: The process of making sure that the money you think you have matches what your bank account says you have.
- Controls: The policies and procedures a church has which aids in functionality, efficiency, and accountability.
- Payroll: The system put in place to make sure everyone is paid on time and accurately.
- Bill Pay: The process of paying bills that is easy, trackable, and auditable. (Don’t forget those three elements—there will be a test later!)
- Technology: Technologies, sometimes called a tech stack, are the platforms used to support your financial processes and collect your financial data.
- Data: The information that is collected regularly and can guide wise decision-making.
- Strategy: How you align the story you want to tell with the story your finances are telling.
(For a deep dive on all seven elements, make sure to download our free report, “Your Church Financial Toolkit.”)
In this article, we’re going to help you think about the three elements where you can see the quickest wins for your church. These are also the three areas where unaligned systems can cause the greatest difficulty for your ministry:
Bookkeeping, payroll, and bill pay.
Church Accounting System #1. Book Reconciliation, aka Bookkeeping
To repeat our definition from earlier: Reconciliation is the process of making sure that the money you think you have matches what your bank account says you have.
It is tracking carefully the donations that come in with the expenses that go out. It is making sure that money is accounted for accurately, that reports are timely, and budgeting is actionable. Whoever is doing your weekly bookkeeping should be an expert who also understands the church context.
Why is accurate book reconciliation important?
The devil is in the details. Minor unknown errors can build up into big problems. For example, your church sends monthly support to missionaries. However, without realizing it, the same invoice for one of the missionaries was entered again and paid out the following week. Situations like this happen more often than you think, and it ties up cash the church could be using for other ministry purposes.
Short-term shortcuts may lead to future regret. Most churches are on a tight budget and rely heavily on volunteers to save costs, and it works. However, in financial management, it is crucial that whoever handles the finances is competent and thorough. For example, we talk with pastors all the time who thought their books were clean until they find out they now need to spend thousands of dollars for a company to clean up their books so they can get a bank loan to purchase a building.
Four questions to ask about your current book reconciliation system:
- Are you confident your books are accurately reconciled monthly?
- Do you have a yearly audit from a third party?
- Do you have a budget and review the monthly activity?
- Is your chart of accounts easy to understand?
Church Accounting System #2. Payroll
Payroll can be complicated!
Employers need to know how to handle W-2’s, state taxes, and 1099s. They need to understand how to comply with labor laws unique to their state. They need to understand the taxes and benefit options that are available.
Church payroll is especially challenging because of the unique and ever-changing rules for clergy. Do you know what defines a clergy? How much housing allowance can be deducted? Should you pay a part-time person as a contractor or as an employee? Qualified experts manage a healthy payroll component.
Why does an informed Payroll process matter?
Get set up right from the beginning. Pastors have several decisions they have to make that impact them financially. Do they want to opt out of social security and put that money into a Roth IRA? Do they plan to rent or buy a house? Asking the right questions at the beginning will help set up the employees correctly from the start.
Surprises at tax time. Because of the uniqueness of non-profit provisions, many pastors have found themselves paying major tax bills at the end of the year because they were uninformed. One harmful tax law for clergy is that the IRS views them as self-employed regarding social security
and medicare, which translates into higher taxes. On the positive side, clergy can take out housing allowance to offset their federal income tax. It is essential to know the distinction or pastors can find themselves paying thousands at the end of the year.
Four questions to ask about your current Payroll system:
- Are you paying your taxes on time?
- Are forms being submitted on time?
- Do you know how much housing allowance can be deducted?
- Are you complying with labor laws for part-time employees?
Church Accounting System #3. Bill Pay
So, here’s our test from earlier. Remember the three elements of every great bill pay system?
It must be:
Bill paying seems simple. You receive a bill; you pay it. However, a healthy bill pay component needs to have checks and balances as part of the process because of the impact large bills can have on the church’s bank account.
We suggest having at least two sets of eyes on each bill before it is paid. One person checks to see that the bill is accurate, and the other checks to see that money is in the bank and that there will be no cash flow issues. Platforms like Bill.com can help create automatic approval processes that are automated and trackable.
Why is a healthy bill pay process important?
Embezzlement protection. Unfortunately, polls show that trust in church leadership is at a historic low. One reason for this distrust is the rampant money mismanagement that happens in the local church. A bill pay process that has two eyes on every transaction greatly reduces the chances that money is being used in the wrong way and builds confidence with your donors.
Cash flow protection. Emergencies happen, so unexpected expenses are inevitable. Also, certain times of the year are easier than others. Paying rent at the end of December when offerings are highest is much easier than when everyone is gone on vacation in the middle of August. Having a process where someone approves the bill, and someone else makes sure money is available can help head off any cash flow situations that may make it more difficult than it needs to be.
Four questions to ask about your current bill pay system:
- Do you know when to classify someone as an employee or contractor?
- What checks and balances do you have in place to pay your bills?
- Are you tracking monthly expenses, and do you know when something is missing?
What’s Your Financial Operating System?
As mentioned at the beginning, every church has a financial operating system. If it’s healthy, all seven vital components work together seamlessly—especially the three we listed here.
But too often, these elements of a financial operating system become siloed. They don’t work together seamlessly, and they fail to do the main thing every pastor wants to do: Remain on Jesus’ mission.
If you feel like you could use a more robust understanding of all seven elements of a healthy church’s financial operating system, scroll down to download our free report, “Your Church Financial Toolkit.”
And if you want to talk to someone about upgrading your financial operating system, we’d love to speak with you! Schedule a free consultation here.