Dan Busby (ECFA) on Church Cash Reserves—How Much Is Enough?

I have known Dan Busby from ECFA for a number of years and we have shared speaking platforms on occasion.  I have incredible respect for him and his organization.

Recently Dan reached out to me after seeing our eBook on Capital Reserve Planning.  He asked if he could reference it in his new eBook on a similar topic.  I am honored that ECFA would consider the merit of our thoughts and make reference to them in their information…of course I said yes (DUH). Below is a blog that Dan and Michael Martin posted on the ECFA site and have granted me permission to repost.  Take the time to read this and make sure you download their eBook at the bottom of the post.

Thanks guys!

Guest Blog by Dan Busby and Michael Martin of ECFA

How much cash should our church have set aside in reserve?

This is such a popular question among churches.  (Hint: If you aren’t asking, you should be!)  Why?

Cash reserves are the cushion that ensures:

  • Operating expenses are paid on-time instead of incurring late fees (typically after payables are 45 days late);
  • The church is in compliance with mortgage covenants, and the financial institution does not foreclose on the property;
  • Funds are available to replace worn-out HVAC (can you imagine the air conditioning system becoming history on a Sunday morning in July, there are zero capital replacement reserves, and the only option is to take a special offering to replace the unit?); and
  • The church has the necessary funds ready to open a new site or launch a new ministry instead of starting from scratch.

Back to our question, when determining “how much is enough”, the short answer is there is no one-size-fits-all.  But here are a few essentials every church should consider:

  1. Understand how important cash reserves are to faithful administration of church resources.  Appreciating the need for cash reserves starts with an understanding of faithful administration of God’s resources.

Churches must make cash reserves a priority if they desire to honor God in how they manage church finances.  Cash reserves play an important part in giving the world the right impression of God!

  1. Build cash reserves in good financial times.  Churches in a growth mode should take advantage of opportunities to build cash reserves.  When a church is holding the status quo or is in decline, there are few opportunities to build cash reserves.

Build cash reserve increases into the budget—otherwise there will be no intentionality in the process.  Consider these two approaches:

  1. Project next year’s revenue to be lower than current year expenses.  For example, a church may project the budget for the following year as 90% of the current year revenue.
  1. Include a cash reserves line in the budget.  Include a line-item in the budget for “Additions to Cash Reserves.”  Then, if cash coming in exceeds disbursements, the excess represents an addition to cash reserves.
  1. Segregate cash related to designated funds and mortgage reserves.  An early priority for the use of cash reserves is to be sure that reserves are at least equal to unspent gifts designated (or restricted) for projects.  Borrowing from designated balances to pay church operating expenses is a recipe for disaster.

Example:  A church has cash balances of $300,000. The church has unexpended designated balances of $350,000. The difference generally means that the church has borrowed and spent $50,000 of designated gifts for operating purposes. This $50,000 should be restored as soon as possible.

Capital replacement reserves are important. Reserves for ministry expansion are vital. But without sufficient mortgage reserves, a church may miss a loan payment and be staring at a foreclosure notice. It is a good idea to maintain mortgage reserves over and above the level required by the lender because use of lender-required reserves may create a loan default.

  1. Be specific with cash reserve goals.  Churches are well served to adopt policies requiring reserves at least adequate to cover unexpended designated gifts and debt service reserves. Targets may be appropriate for other reserves such as for capital replacements and ministry expansion.

A cap may be appropriate for operating reserves (other than the reserves relating to designated gifts, mortgage reserves, capital replacements, and ministry expansion). The adequacy of these operating reserves is often measured in the number of months of cash.

  1. Communicate the importance of cash reserves to the congregation.  Having adequate cash reserves does not exhibit a lack of faith but reflects attentiveness to good stewardship. Proactive church administrators communicate both clear measurements and the rationale for the levels of cash reserves.  This can boost congregational confidence for greater giving.

We hope these considerations are a helpful starting point in determining the appropriate level of cash reserves at your church.

For more tips and essentials, check out ECFA’s latest eBook – 9 Essentials of Church Cash Reserve.

For assistance with Life Cycle Planning, download your free copy of 5 Intentional Steps to Establish a Capital Reserve Account.

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