Rainy Day or Shelter from the Storm? — Developing Cash Savings
My mother used to always say I should save money for a rainy day. Even as a small child, when I was given money from grandma or found some coins in my Christmas stocking, mom said I should give a portion to God and give a portion to savings. “You just might need it for a rainy day,” she said.
All throughout my childhood, I saved a lot for that rainy day. When I was a teenager, I realized that rainy day never came. So, I spent it. I don’t remember what I bought, but it wasn’t significant.
Then the rain came, and I had nothing.
Does your church have money set aside for a rainy day? Many do not. Scripture is quite clear that saving for known and anticipated needs is indeed a suitable and proper use of resources. Joseph saving grain for seven years to rescue not only the country but the entire region, is written in detail in Genesis 41. Proverbs 6:6-11 tells of the ant and the sluggard and Proverbs 21:20 cautions to not devour treasure and oil.
A non-profit organization does not mean a no-surplus organization. Every successful businessman, every business school professor, every accountant will tell you that having a healthy reserve account is one of the best financial practices an organization can have. For our personal finances, we tend to call this a savings account. In the business world, it’s generally referred to as operating reserves.
Operating reserves is one of a number of financial health indicators and increases your ability to respond to temporary or unexpected changes in revenue or expenses. The benefit of additional cash is an increase in delay before a response is required. The more cash on hand, the longer the response time, giving more opportunity to consider the situation, make an appropriate plan, get everyone on board, and make necessary adjustments. The smaller the cash reserves, the faster and more off-the-cuff decisions you’ll be making, increasing the potential for poor and untimely decisions. Lack of financial safety can put you in an undesirable and vulnerable position.
Creating this rainy-day fund can benefit the church during a cloudy or “rainy day” period in the church. It can also provide shelter during a horrible storm. It can be used for unforeseen expenses or cash shortfalls, used for replacement equipment or repair of property, and can fund unexpected opportunities. Ever have a senior pastor leave suddenly or under duress? Financial giving frequently plummets until stability in leadership is restored. Ever have to replace a leaky roof that wasn’t budgeted for? They’re extremely expensive. If that neighbor finally agrees to sell their property that is next to yours, they may want payment in less than a month or no deal. A healthy operating reserve gives you the flexibility you need to make healthy ministry-related decisions that benefit the church and the Kingdom.
Betty lived behind the church. She hated us. Her house was on a large corner lot and her property shared a brick fence with the church parking lot. Even as an elderly white-haired woman, she would climb up on a step and poke her head over the fence and yell at church members who she thought were making too much noise. She sent letters threatening to sue us. She called the police when congregants parked in front of her yard on the street. We tried desperately to love on her and be a good neighbor. She wouldn’t hear of it. Members took over cookies, offered to care for her run-down yard, and fix her roof. No sooner that she discovered you were with our church, Betty slammed the door on you.
On several occasions, church leaders offered to buy Betty’s house, even offering a premium for her trouble to move. When a pastor and I met with Betty one afternoon, she raised her voice and exclaimed, “Over my dead body will you ever get this house! Now stop making all that noise over there and leave an old woman alone!”
As fate would have it, Betty died the next year. And because God has a great sense of humor, her kids called the church and offered to sell the property to us. As she had previously proclaimed, we bought her house over her dead body!
I don’t know what Betty’s relationship with God was like, but the humorous situation became serious very quickly. Her kids wanted to sell the house immediately and only gave thirty days for the church to come up with several hundred thousand dollars, or we would lose our opportunity. Fortunately, the church had significant funds saved up for a future rainy day and we were able to write a check within a couple weeks after approval from our board.
But how did we get to having so much money available?
Operating reserves is usually viewed as a ratio turned percentage, namely what percentage of the year that is covered by reserve, such as 20%. Accountants can calculate this in a variety of ways, but to simplify it, we’ll discuss it in a month-based formula with easy-to-understand numbers.
Let’s say your annual budget is $600,000. If you divide that by 12 months, your monthly needed revenue is $50,000. If all revenue were to immediately stop, how much cash do you have to keep operating on a monthly basis? Whatever cash you have available, this is your operating reserve. If you only have $5,000 in the bank, then your operating reserves will only last you three days. If you have $25,000 in cash in the bank, your operating reserve is only two weeks. If you have $50,000, then your reserve is one month; $250,000, then five months’ reserve. This also assumes zero income during the time period and also assumes no reduction in expenses.
At the very minimum, your church should have enough reserves to cover at least one full payroll. At the most, no more than two years (this is not common). Most CPAs and non-profit financial managers recommend at least three months operating reserves, or 25%. This reserve amount would keep your church stable for three months with no changes to expenses. However, a more conservative target would be three to six months. For any size organization, this amount of money can feel overwhelming when considering three to six months of cash being saved rather than spent on ministry. If your circumstances include one of the following, consider having your board increase your target operating reserve amount:
- If your strategic ministry plan is risky, requires significant cash, or has never been attempted by your organization before.
- If your debt load is substantial or if your monthly mortgage payment is considerably high. In the midst of a crisis, this can be difficult to reduce.
- If you have high fixed expenses like employees and leases. During challenging times, reducing employees can sometimes exacerbate the already difficult situation.
To create an operating reserve, you must plan for it. Have your board create an operating reserve plan, budget for it, and put it into action. It doesn’t happen overnight, so create a schedule to build it gradually and intentionally, putting money aside when able.
- Put a line item in your budget called reserves, or savings. Each month siphon the budgeted amount out of the operating account and physically put it into a different bank account. Having the money in a separate bank account helps your staff and board better understand that this money is designated for a specific purpose.
- If you budgeted for a staff position that is currently vacant, designate that money to the reserve account until the position is filled.
- Designate windfalls such as excess cash at the end of the year or surprise large donations.
- If you budget for depreciation, this money can sometimes also be lumped into operating reserves.
In your operating reserve policy, designate who has authority to spend the funds and for what purpose. When you hit your target amount, decide what to do with left over cash that was otherwise designated for building up the reserves. When you do spend the reserves, revise the old plan to build it back up again as soon as possible. Each year, when adjusting your annual budget, ensure you plan for adjusting the operating reserves as well.
There is danger in saving too much, however, and not keeping balance between having faith and having a backup. Jesus describes the danger in not knowing the difference between saving and hoarding in Luke 12:13-21, stating, “Be on your guard against all kinds of greed; life does not consist in an abundance of possessions.”[i] As church leaders, we must plan ahead and prepare for what is expected, but we also must balance that preparation with a faith in God that sometimes requires us to only trust in His provisions. Both are Biblical. Both require balance.
The story of Betty is a bit amusing, but the significance is really about the church efforts prior to knowing what God was going to do with the situation. The church had spent years building up the operating reserves necessary that ultimately allowed it to jump on such an opportunity. As a result, the church didn’t have to borrow money, ask for money from church members, or lose out on the chance to expand ministry.
It was raining when Betty died. But we had an umbrella.
[i] Luke 12:14, NIV
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