Basics of Church Financial Reporting – Part II
In Part I of this article I shared that the financial well-being of the parish is one of the most important fiduciary responsibilities of the Vestry. Therefore, in order to understand the finances of the parish, financial reports need to be organized and presented in a way that is clear and easy to read. The first part of this article reviewed the Income and Expense Report, first looking at Sources of Operating Income. In Part II we will continue that by discussing Grouping Operating Expenses. Then we will discuss the Non-operating Income and Expense Reports, as well as the Four Important Questions Vestry Members Should Ask. In addition, you may wish to view the ECF webinar entitled “Fearless Finances”.
Grouping Operating Expenses
In the same way that like income sources should be grouped together, similar kinds of operating expenses should be grouped together so you know how much it costs to maintain the buildings or operate the office.
Work outside the Congregation: This group includes the diocesan pledge or assessment and outreach done from the operating budget.
Personnel: This group should include all salaries and benefits paid to employees. Almost everyone working for you is an employee, not an independent contractor. Clergy with a contract (not supply clergy), administrators, organists, and sextons are almost always employees. They should be paid through payroll and receive a W-2 at the end of the year, not a 1099.
Program Expenses: This would include all the supplies and regular expenses for the Altar, Sunday School, youth group, music program, and any other basic core programmatic function of the congregation. Expenses for a soup kitchen, food pantry, after school program, etc. are non-operating items and should be reported with other non-operating income and expenses.
Office Expenses: Paper and other office supplies, expenses for the copy machine, telephone, internet access, etc. should be grouped here.
Plant Operating Expenses: This includes insurance, utilities for the church plant, including a rectory used as a rectory, maintenance supplies and minor repairs. Large expenses for the plant are capital expenses and should be included with other non-operating items.
Non-operating Income and Expense Report
As needed, the non-operating income and expense report could include:
Income — report any capital contributions here; if they were earmarked, list the project
Expenses — show what has been paid out for specific projects
Contributions to Investments:
This includes all funds treated as principal contributions to the investments. It is good practice for all unrestricted bequests to be treated this way.
Show income and expenses for programs like food pantries, after school programs, etc. here
Funds for Transmittal:
If at the United Thank Offering (UTO) in gathering, people make checks payable to the parish, you need to deposit them and make a check to the UTO and send it. Show such “in-and-out” activity here.
Columns to Show on the Income and Expense Report
We have discussed how to group the items shown on the report to make it more user-friendly and easier to understand. Now we will discuss what columns of numbers should appear on the report.
The Four Questions
There are four questions Vestry members should be asking when looking at a financial report, and the report should make it easy to find the answers.
- How are we doing so far this year?
- How does that compare with where we thought we would be at this point?
- Are we doing better or worse than last year?
- What are our targets for the year?
Each question can be answered by a column of numbers. As explained above, the groupings of income and expense items should have subtotals, and those subtotals should be bolded. Most of the time the discussion can be about the subtotal, unless there are unusual things happening in some of the individual lines that need an explanation.
- The first question can be answered by a column of numbers that show the year-to-date actual activity. If you are at the June Vestry meeting, the first column should show the total activity from January through May. See a sample report here.)
It is not helpful to show the previous month’s activity. Cash flow varies at different time of the year; sometime a bill for one month is paid in the next month. Showing one month’s activity (unless you are at the February meeting and that column is January) probably just means that you will spend time rehearsing the usual variances in cash flow.
- The second question is answered by a column that shows your current year’s budget year-to-date. So at the June meeting this column would just be the budget line divided by 12 and multiplied by 5 to show five months’ activity. Anyone can easily see whether the actual number is above or below the projected budget.
- The third column should be the previous year-to-date actual. In June 2017, that would be the activity from January-May 2016. That tells you whether contributions from individuals are running ahead or behind the previous year.
- Finally, the fourth column should be the total current year budget. This tells you what your targets are for each category and grouping for the entire year.
If one of these columns is missing, you won’t be able to answer one of the important questions. If other columns are present, it will just make things confusing and reduce the efficiency of the report. You don’t need percentages or variances. You will be able to understand the breakdown of numbers as you read across the four columns I recommend.
The entire report does not need to be longer than two pages. If the operating budget report is longer than two pages, it means that it has small, unimportant numbers. Those numbers should be included in some other budget line. For instance, you don’t need a separate line to show the number of pens you bought; that expense should be included in the line called “Office Supplies.” A rule of thumb is that if a budget line is less than 1% or 2% of the budget, it should probably be included in some other line.
There! Now you know what a well-organized financial report is, and you know how to read and understand it. You know what questions to be asking and can be a good member of the financial leadership team of your parish.
If you have any questions, please contact me: firstname.lastname@example.org or 347-713-2218.
Jerry Keucher, an Episcopal priest, is the author of Remember the Future: Financial Leadership and Asset Management for Congregations (2006) and Back from the Dead: The Book of Congregational Growth (2012). He serves as priest-in-charge at St. Mary’s Episcopal Church in Brooklyn, New York, and works with ECF as a consultant. Jerry has served as chief of finance and operations for the Episcopal Diocese of New York. He has held similar positions in financial leadership, including Staten Island Botanical Garden and Staten Island Institute of Arts and Sciences. A gifted linguist he has taught Greek and Hebrew at Princeton Theological Seminary and Yale Divinity School.
(This ECF article is part of a series designed to help clergy and lay leaders address the economic challenges of congregational ministry in the 21st century and is made possible through a grant from Lilly Endowment’s National Initiative.)
- Basics of Parish Finances an ECF webinar led by Jerry Keucher, February 2014
- Fearless Finances - Parish Budgets an ECF webinar led by Jerry Keucher, October 2016
- Basics of Church Financial Reporting - Part 1 by Jerry Keucher, Vestry Papers, March 2017
- Lessons from a Rookie Treasurer by Tyler D. Schleicher, Vestry Papers, May 2014
- Accounting Software: Finding the Right Fit by Philis Jones, Vestry Papers, May 2014