The financial situation of congregations and nonprofit ministries is very important, though it is a topic that does not garner enough attention in leadership. Pastors need to be involved in financial leadership so they can help their churches be good stewards of God’s gifts. This blog is adapted from Dr. Jamison Hardy’s book Pastoral Leadership: Shepherding and Caring for God’s People.
What follows is a list of financial terms and definitions in alphabetical order that every pastoral leader ought to at least be familiar with as he carries out his duties within the congregation and ministry to which he has been called. During my doctoral studies, I was exposed to the Harvard Business School Online, which has a plethora of helpful insights and very good, easily understandable financial pieces. These terms are just some of the key and important terms that you ought to be aware of as you
carry out your function as a leader.
(1) Assets:
Assets are items your congregation owns that can provide future benefits to ministry, such as cash, inventory, real estate, office equipment, or accounts receivable. There are different types of assets, including the following:
(2) Current Assets:
These might include money market accounts, stocks, or other liquid forms of congregational assets that can be turned into cash within a year.
(3) Fixed Assets:
These are funds that a congregation owns but can’t immediately turn into cash, such as mutual funds and long-term fixed-return investments. These generate long-term income for congregations and ministries, which often use them as an endowment where assets are placed and used to generate future income.
(4) Asset Allocation:
Most of the congregations that I have in my district do not have to be concerned with asset allocation. But for congregations and ministries with investments or an endowment fund, asset allocation is how they choose to distribute their money between different types of investments, or asset classes. This diversification of assets protects long-term funds when particular market sectors decline sharply. These allocations include the following:
(5) Bonds:
When your congregation buys a bond, you’re essentially lending money, typically to the government or a corporation. The congregation receives interest payments at set intervals and gets back the loaned amount when the bond matures—or after a specified term when the bond can be redeemed.
(6) Cash and Cash Equivalents:
This is obviously the congregation’s cash reserves and any asset that can easily be turned into cash when necessary.
(7) Stocks:
Some congregations and ministries invest in stocks. A stockholder owns a share of a public or private company. When your congregation buys stock in a company, it becomes a shareholder and can receive a share of the company’s profits, called dividends, when they are distributed.
(8) Balance Sheet:
This is a financial statement that lists the assets and liabilities of a congregation or organization. It shows the ministry’s worth, or “book value.” The balance sheet (often referred to as the Treasurer’s Report) usually shows a list of assets or income and the total value of those assets at the top. Below that is a listing of liabilities or expenses. The liabilities plus the church’s equity should equal the total assets.
(9) Capital Gain:
Capital gain measures the difference between the amount your congregation initially paid for an asset or investment (or the value of a donation it received) and its value when sold. An increase in value is called a capital gain; a loss of value is a capital loss. This becomes important if you have excess cash in the congregation and you have investments that generate income or grow. In my congregation, we had two small investments, and regularly the congregation used the income from these two for growth and ministry opportunities.
(10) Cash Flow:
This is the amount of the congregation or ministry’s cash that is moving in and out at a particular time. Cash flow is a crucial element for any pastor to be aware of as he leads his church. Poor or low cash flow can cause a congregation to struggle mightily with its overall health and wellness because it does not have enough cash on hand to pay bills or salaries. Too often in my ministry, I have come across pastors, as well as church leaders, who cared little or nothing about cash flow. This has always led to difficulty in ministry and constant conflict with the congregations. Maintaining healthy cash flow is one way to manage a congregation well.
(11) Cash Flow Statement:
This financial statement shows what happened to a congregation or ministry’s cash during a given period (usually a month, a quarter, or a year). This report shows how the congregation received and spent its cash over that period. It includes an overview of operating, investing, and financing activities during the reporting period.
(12) Compound Interest:
This is sometimes described as “interest on interest.” When your congregation deposits money in an interest-bearing account, interest is earned over time and added to that original amount deposited. This new balance then accumulates interest over time. When this new interest is added, the savings or investment grows that much faster. Compound interest is a great way for congregations and ministries to grow their savings and investments. But the same compound interest can also increase
your debt for money you borrow. Compound interest is charged on the initial amount you were loaned, increasing the amount that must be paid as the interest is added to your outstanding balance over time. Compounding interest is one of the greatest financial tools that a congregation or ministry can utilize to grow their net assets over time. This provides for more ability to do ministry and missions throughout the life of the congregation.
(13) Depreciation:
Depreciation is the amount an asset’s value decreases over time. This could include the value of your church computer, printer, or sound equipment. This is generally reflected in a financial statement when discussing a congregation or ministry’s facilities or equipment. It is important to think of depreciation as how much of an asset’s value the congregation has used over time. That will help prevent this decreasing value from skewing the financial statements in a way that makes your congregation look far worse off than it may be.
(14) EBITDA:
This is an acronym that stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, or the total cash that comes into your congregation and ministry through offerings, donations, interest, etc. EBITDA measures your congregation or ministry’s ability to generate cash flow to pay bills and salaries. To figure your congregation’s EBITDA, you would add net profit, interest, taxes, depreciation, and amortization together. While this is not used by many congregations, it does show the true health and wellness of any congregation or ministry from a financial perspective.
(15) Income Statement:
This financial report summarizes a congregation or ministry’s income and expenses during a given period. An income statement is sometimes called a profit and loss (P&L) statement. This is one method of financial measurement that all congregations and ministries should be paying attention to regularly to see if their offerings and donations are covering their congregation’s expenses. Over my time as the bishop and president of the English District, I have seen way too many situations where congregations had no idea what their income statement even looked like, let alone whether it was healthy or not. As a pastoral leader, know the income statement and where the variations may be as you discuss the financial situation at your ministry or parish.
(16) Liabilities:
These are the opposite of assets. Liabilities are debts your ministry owes to others, such as bank debt, wages, and money due to companies that supply your congregational needs, also known as accounts payable. Different types of liabilities include the following.
(17) Current Liabilities:
Sometimes called short-term liabilities, these are the bills that are due within the next year.
(18) Long-Term Liabilities:
These are financial obligations a congregation or ministry is not likely to be able to pay off in a year, but must be paid off over a longer period, like a mortgage.
(19) Liquidity:
This describes how quickly you can convert your congregation’s assets into cash. Clearly cash itself is the most liquid asset. Your least liquid assets are items like real estate or land because these can take weeks or months to sell. That is the reason some ministries and congregations may have large assets like buildings and property and still struggle to pay salaries and bills because they lack a cash flow and have a low overall income.
(20) Net Worth:
Net worth is the value of your congregation’s assets after subtracting what it owes in bills, debt payments, salaries, and other expenses. The remaining number shows you the overall state of your ministry’s financial health. This can also help guide the decisions you make in the future pertaining to financial matters.
(21) Return On Investment (ROI):
Return On Investment compares the cost of a project or activity with the expected return or value that it will bring to your congregation’s ministry. Typically, this number is shown as a percentage. You can use this percentage to evaluate whether a project will be worthwhile for your ministry to pursue. In business, ROI is calculated using the following equation: ROI = [(Income – Cost) / Cost] × 100. That can be difficult for a congregation because the return for projects and activities cannot always be measured in monetary terms. But measuring the cost of a congregational activity compared to the ministry benefits it will bring is important so you know whether activities and projects are worth the time, money, and effort involved. In most cases, this is never a thought for congregations, and they will carry on with activities and fundraisers that have a low or zero ROI for the congregation.
An example of this is the spaghetti dinner that we did at my parish early on. After doing the spaghetti dinner for several years, I decided to calculate how many volunteer hours and how much total volunteer product we received from members and subtracted that from the amount of money we earned in the fundraiser for the preschool. It turned out that we could have simply taken the dollar amounts of the supplies that people donated and given that to the church without any effort, and we would have made more money than we did during the actual fundraising event. After the
second year of doing this on a negative ROI, I encouraged the leadership to cease doing this fundraiser and instead simply request financial support. The result was a significant increase in overall income for the preschool.
(22) Valuation:
Valuation is the process of determining the current worth of an asset, company, or liability. There are a variety of ways you can value your congregation or ministry, but regularly repeating the process is
helpful, because you’re then ready if ever faced with opportunities or challenges.
(23) Working Capital:
Working capital is the difference between a congregation or ministry’s current assets and current liabilities. Working capital—the money available for daily operations—can help determine a
church’s operational efficiency and short-term financial health and wellness.
Conclusion
While the conversation about finances is not very popular among theologians, it is a very important element for pastoral leaders as they serve and guide the people of God. I fully realize that for many pastors, reading this blog is not going to be the most enjoyable thing for them. However, it could be the difference between having success or not as a pastoral leader in a congregational setting today. Understanding the importance of finances and keeping the topic in a theological perspective are the tasks of the pastor as he leads the people of God in stewardship.
One way to be a faithful steward of God’s gifts to His church is staying organized. Like businesses and other nonprofits, churches need budgets, payroll, transaction records, and other financial resources. Church360° Ledger has all of the tools to help your church’s finances stay organized and help all be faithful stewards of God’s gifts.
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