Understand Your Church Financial Statements. Make a Greater Impact: 5 Key Areas to Assess
Church financial reports are easier to grasp than most pastors think. You just need to understand a handful of numbers to communicate more clearly and make better, more informed decisions.
You don’t have to understand every number to leverage your church’s financial reports. Just ask Gene.
Feel overwhelmed when you try to read your church financial statements? Apply the Gene Kranz rule.
Gene Kranz was responsible for NASA’s first lunar landing mission, leading the mission from Houston, Texas. While there were many numbers, metrics, and calculations NASA had to do to get the rocket to the moon, Gene knew there were a few metrics that were mission critical and needed to be watched consistently.
In the same way, there are a few key areas you can use to assess your church’s financial health. By tracking these numbers monthly and correcting early on, you can make sure you land on the moon instead of lost in space. You’ll have confidence talking with the board, the financial team, and donors, and you’ll feel more confident making decisions for your church.
Five key questions to help you assess whether your church’s finances are on track:
- Is our spending aligned with our vision?
- Are we taking in enough money?
- Is our debt manageable?
- Are our people financially healthy?
- Does our spending align with best practices?
We’ll identify key numbers, define some of those confusing accounting terms, and explore what those numbers mean in the big picture. We also have a related webinar you can find here.
Note: If you’re a Parable client, you get monthly Core Reports from us. If you want to upgrade those reports, check out our Advanced Reporting options. (If you’re not a Parable client but want to be, reach out.)
Ready to take off? T minus 3, 2, 1. Liftoff!
1. Is the church’s spending aligned with our vision?
This is one of the biggest challenges for churches—with limited resources and increasing costs, how do you ensure your church is spending its money on the right things?
It starts with planning and prioritizing your spending. That’s another way of saying budgeting.
But before you tune this out because you don’t like budgets…
A budget is simply a plan to focus your spending on the key items that will advance your mission and vision. A budget can actually be freeing rather than restrictive because it helps you prioritize your dollars and helps you know how much wiggle room (dollar-wise) you have for each project.
Here are some key numbers to assess whether your church’s spending is aligned with what you envisioned when you prepared your budget.
Profit and loss statement
A profit and loss statement shows actual income and expenses and compares them to your budget. For non-profits, the profit and loss statement is referred to as the statement of activities report.
Your profit and loss statement helps you see where the church’s money is going. What’s coming in and what’s going out? When money goes out, where does it go? It’s all on this report.
Budget to actual variance analysis
A budget to actual variance analysis is a process in which you compare what you actually spent with what you budgeted.
This process helps you understand the WHY behind things matching up (or not matching up) with your budget. It helps you look back to see what worked and look ahead to see what’s next.
Did a new, unexpected ministry need pop up that the church put lots of resources into? Maybe the budget needs to be adjusted to allot resources for it. Did a bucket for another ministry go mostly untouched? Maybe the church can put those funds into something else.
Your numbers will likely vary month to month, so seeing them in context of your budget for the entire year is helpful so you understand the overall impact.
You should look at your year-to-date numbers every month to make sure your church is still on course. If your church set aside $50,000 for building repairs, and you’ve already spent $40,000…and it’s only April? It’s better to know that now so you can plan wisely for the rest of the year.
Spending on Mission Assessment Tool
With the Spending on Mission Assessement, you identify and prioritize your key spending areas from your mission and vision. Then you go through your budget categories and match each with one of your key areas and see how each category fits and aligns with your key mission and vision areas.
By doing this, you can see how you’re funding your vision and prioritizing those ministries. You will also see spending that doesn’t fit with your priorities and may need to be reconsidered.
Ministry Assessment Tool
The Ministry Assessment helps you determine how well each ministry aligns with your mission and vision, how effective each ministry is, and how significant the investment is (both financial and time). This tool helps you make sure you are funding the right ministries and keeping your dollars focused on your ministry priorities.
We use the Spending on Mission Assessment and Ministry Assessment as part of our Advanced Service. If you are looking for helping aligning your dollars and mission, find out more here!
2. Is the church taking in enough money?
Numbers taken in isolation don’t always tell the whole story. If your expenses are greater than your budget, but your income is also up and your net operating income is positive, then you likely don’t have an issue.
In other words, you need to zoom out to understand the full picture.
Net Operating Income
Your Net Operating Income is the difference between your income and expenses.
Typically, your income should be the same as or higher than your expenses. If your Net Operating Income is negative each month, you are losing money, and you’re going to run out of money if you don’t change course.
For many churches, your net operating income is an accurate gauge of your income and spending. However, because of accounting standards, it’s not quite that simple. For churches that have loans or mortgages, or are buying more expensive assets like furniture or vehicles, your Net Operating Income may not tell the whole story.
Because of this, we suggest referencing your operating cash flow or change in cash and equivalents. (Both of these numbers can be found on your statement of cash flow.)
Operating Cash Flow
Your Operating Cash Flow shows the net of your cash flow from your income and your operating expenses. This includes cash that is spent but that doesn’t show in your Net Operating Income.
Change in Cash and Cash Equivalents
Cash equivalents are things that can quickly be converted to cash if needed. When it comes to being able to cover costs, it’s important you have the cash to pay for them.
Both your Operating Cash Flow and Change in Cash and Cash Equivalents describe the movement of cash beyond what shows on the statement of activities. For example, when you pay your mortgage each month, the interest you pay shows as an expense, but the principal pay down does not. (And accountants wonder why nobody understands the rules…🤔). If your Net Operating Income is positive, but your Operating Cash Flow or your Change in Cash and Cash Equivalents is negative, it likely means you spent more money than you took in. That is why it’s important to review these numbers along with your Net Operating Income.
Another Note: Advanced Reporting from Parable makes it easy to stay on top of all these numbers with easy-to-read reports and visuals. Wondering if that kind of reporting could help you? We’d love to talk.
3. Is our church’s debt manageable?
Number of months of cash on hand
The idea with cash on hand is how long you can pay your bills if you don’t get another dollar. This is also called an emergency fund. The recommendation is to have 3-6 months of expenses in cash and cash equivalents.
We all saw the importance of this during COVID-19, when giving dramatically changed overnight and the economy was uncertain. While it’s unlikely that your church will go to $0 in giving overnight, 3-6 months cash stored can protect your church and give you enough buffer so you don’t have to worry about giving each week. Also, banks like to see this amount before giving out loans.
Total debt ratio formula
Your total debt should not be more than twice your annual giving. That’s simple to calculate—take your total giving for the last 12 months and multiply by 2. That should be the maximum amount you have in debt.
Debt service coverage ratio
Another way to calculate debt is debt service, or the monthly cost of your mortgage. A rule of thumb is that no more than 15–20% of your income should go toward your monthly debt payment.
Your total debt and debt service may be different numbers, so a conservative approach is to take the lower of the two numbers as your debt limit. Both of these can be found on the balance sheet.
Maybe you only have two months of cash on hand, or maybe your debt is three times your annual revenue. Knowing this information means you can start taking steps in the right direction, like reducing spending for a season to pay down debt or doing a generosity campaign to increase giving.
4. Are our people financially healthy?
This sounds a little weird to some people—measuring the financial health of your people. But it shouldn’t sound weird.
Jesus says this in Matthew 6:21, “For where your treasure is, there your heart will be also.” How people view their finances is an important indicator of where their heart is.
So giving metrics are an important spiritual health indicator for your people. Your people need to be discipled in this area just like any other area. If it was possible to measure people’s prayer lives, if you saw that someone wasn’t praying, you’d want to reach out to them, find out what’s going on, and encourage them in their prayer life. The same is true with their financial health and their stewardship.
Because a church is really just a collection of families, if the families are financially healthy, it’s likely that the church is financially healthy. But certainly the opposite is true.
Monthly giving per unique donor
There are two metrics you can use to keep a pulse on your people’s financial health: Average donor giving and giving per attendee.
You can calculate these by taking the total amount given for the month and dividing it by the number of donors or the number of average attendees. These should be shown on a graph so you can see the trend over time.
For example, maybe your church’s giving is off track and giving per attendee is going down, but the number of attendees is increasing. This means the church is growing, and the new attendees have yet to commit to supporting the church financially. Your church can engage new attendees to connect them to the church and cast a vision for how their financial support matters and makes a difference.
Tracking the right numbers helps you understand your church and make better, more informed decisions.
5. Is our church’s spending aligned with best practices?
We get this question a lot: How much should our church be spending on staffing, the building, etc.?
There are a few rule of thumb numbers that are helpful for comparing or benchmarking your church against other churches. This will vary by church, but these are helpful to understand and see how you line up.
How do churches spend their money?
Facilities: 10–25% of income (including mortgage, maintenance, operations, and capital expense savings … with a reminder that building debt should not be more than twice your annual giving)
Staffing: 35–50% (for multisite churches, 35–40% with central office covering administrative costs)
There are multiple variables here that will impact these numbers such as the stage of the church, the size, if your rent or own your building, and more. A good rule of thumb is that the total of these two should be no more than 65-70% of your budget.
You can find your church’s spending in each area in your profit and loss statement or statement of activities report.
Do you know how to access and read your numbers?
QBO makes these numbers fairly easy to access and turn into reports. If you don’t work with Parable currently, your accountant should be able to help you.
But if you want reports and dashboards designed for non-accountants and customized for your leadership style and needs, we offer Advanced Financial Reporting. Parable’s new Advanced Reporting offering shows you all of these so you don’t have to dig these numbers up. You just login and see the numbers you need in easy-to-read and understand visuals.
For more on Advanced Reporting and how it can help your church keep your money on God’s mission, check out our Advanced Financial Reporting for Churches.