Are your Financial Statements Contributing to Poor Decisions

Whether your leadership position is senior pastor, board member, or department leader, one common task you all share is the need to effectively manage and oversee financial resources. While the depth of interaction with financial statements may differ between ministry positions, everyone uses financial data to make decisions. Unfortunately, the financial reports for many organizations may be masking inefficiencies, concealing abuse and contributing to poor decisions.

As leaders in the church, it is imperative that financial reports are clear and complete in order to provide relevant and timely information for decision makers. In my interactions with various ministries over the years, I’ve seen first-hand how poor financial data can have devastating consequences. Consider the following real-life scenarios:

• The financial responsibilities at a small church were split between the senior pastor and a parttime secretary. The pastor decided what bills should be paid and had the secretary write the checks. While a board member would sign the checks, no one but the pastor viewed the credit card bills or invoices. The board only received a partial financial report each month that included offering totals, balances for the checking and savings accounts, and outstanding balances for certain vendors. By not allowing others to review invoices or credit card statements, and only providing a limited amount of financial data to the board each month, the pastor was able to embezzle ministry funds for several years.
• At one church, the pastor, treasurer, and other board members were locked in a disagreement about restricted funds. Some board members accused the pastor of misusing the funds, while the pastor and treasurer tried to convince the board that it was disbursed appropriately. The feud continued for many months, until the pastor and treasurer resigned in frustration, which left the church unable to effectively minister to their community. A subsequent audit confirmed that while the restricted funds had, at the board’s direction, been appropriately disbursed, the transactions were not clearly recorded in the financial reports.
• When leaders decided to renovate office space at one ministry, they used surplus funds maintained in a savings account. Unfortunately, due to unclear financial reports, much of the available funds were restricted for missions. By the time leadership realized their mistake, the renovations were complete and the funds disbursed. Severe budget cuts were necessary in order to replace the restricted funds. While the funds were being replaced, many ministry opportunities were missed or delayed due to a lack of funds.

Scenarios like these can be avoided by providing accurate and timely financial data in a format that leaders can understand. This often means multiple reports in different formats. Detailed financial data will be useful to leaders who are adept at reading financial reports and enjoy digging into numbers. However, summary-level reports will be useful to other leaders who are interested in the bottom line. Graphs or charts may be useful for those leaders who like to view trends and are interested in historical comparisons or are adept at spotting anomalies.

• Important Tip: Designate at least one or two board members who have a financial or business background to review the financial activity in detail each month. These board members can assist in providing advice or recommending strategies to the entire board, as necessary.

In order to ensure your financial reports are complete, accurate, and timely, consider these best practices:

• Financial reports should include a summary of all assets, liabilities, and net assets, which is commonly called a balance sheet (or Statement of Financial Position). The financial reports should include a summary of revenue and expenses, commonly called an income statement (or Statement of Financial Activities). All current financial software programs can provide these reports.
• Financial reports should be created each month and provided to ministry leaders for review. Full reports can be provided to executive leadership, while departmental reports can be provided to specific ministry leaders.
• The balance sheet should include prior year balances to show how current activity compares to the previous year.
• The income statement should include a comparison to expected, or budgeted, revenue and expenses. Comparing current activity to the budget will help identify financial trends that may need immediate attention.
• A detailed transaction history for the income statement should be available if more information is needed. This report will provide more transparency and allow ministry leaders to drill down into various account activity. This extra level of transparency can protect organizations who only have one or two people involved in financial activities.
• If not clearly identified in the balance sheet and income statements, a separate report of restricted contributions and activity should be prepared.

Lastly, review your month-end “closing” process. The closing process includes actions performed each month to ensure all financial data is captured and included in the financial reports. It includes reconciling bank and investment accounts, researching outstanding checks and deposits, and reconciling donor contributions records.

Important Tip: Timely bank reconciliations are crucial because they allow the church to:

• Identify items that have not been recorded in the financial records.
• Have accurate financial reports.
• Identify bank errors or unexpected bank fees.
• Identify unauthorized disbursements via check, debit card, or EFT and other fraudulent activity.

Don’t let inaccurate or incomplete financial data contribute to poor decisions. Consider these tips to improve your financial reports to help you successfully manage the “business of ministry.”