In Pursuit of Profit
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While many industries have their own accounting nuances, churches utilize entirely different principles and practices. As a result, their financial needs are far more complex than many other similarly sized organizations. Churches and businesses view revenue generation differently, use revenue differently, and report revenue differently. Churches need money to operate; however, unlike businesses, their primary goal is not to generate revenue. Instead, they collect money to pay for operational expenses, fund campaigns, and support their ministries. Furthermore, a church does not have shareholders, so any excess income is not paid out – it is reinvested to advance its mission. This is reported on a “statement of activities” instead of an income statement like a traditional business. To reward that good that religious organizations do in their own communities, they are granted a tax-exempt status. However, this exemption does not apply to all applicable taxes, only income tax. As a result, they must abide by different bookkeeping regulations.
Their unique position as a tax-exempt, non-revenue-driven organization poses a challenge for financial professionals that are not used to dealing with these specialized entities. Bookkeepers and accountants that do not typically work with churches tend to struggle with utilizing a fund accounting approach, establishing the proper controls to mitigate fraud risk, and setting appropriate planning horizons. Fund Accounting Churches track their finances by fund rather than general ledger category. Funds for international missions, local community outreach efforts, new building plans, women’s ministry groups, youth programs, deacons, or any other specific use are separated to allow churches to track associated expenses against the balances in each. Therefore, fund accounting ensures responsible stewardship of finances. Depending on the church structure, fund accounting may provide more than a logical way to separate tithes and special donations. Some churches have committees or boards to independently manage different funds for greater operational effectiveness. Therefore, this accounting structure also aligns well with their management structure. Funds can be unrestricted, temporarily restricted, or permanently restricted, as well as established as grants or campaigns. These distinctions are not merely semantics. Having too many restricted funds can result in cash flow problems, tying up money that could be better utilized in an unrestricted general fund to cover essential day-to-day expenses. In fact, this is the biggest mistake that churches make financially. Churches can avoid this problem by only creating new funds when they are truly necessary. For churches that already have too many restricted funds and campaigns, encouraging members to donate to the general fund will ensure that finances remain available for whatever needs arise. Otherwise, money can get tied up in a campaign until the project is fully funded. A bookkeeper or accountant working with a church should be comfortable with managing finances through fund accounting and be able to advise on when churches need to create new funds, as well as how they can shrewdly combine funds for better operational efficiency. Without fund accounting churches do not have a way to report different types of donations and properly account for expenses, which is crucial for their tax-exempt status. Possibility for Fraud Unfortunately, churches are not immune from instances of fraud. Like any business, churches can fall victim to the actions of unscrupulous individuals. Small churches are more likely than small businesses to have inexperienced people managing their finances, which makes them more likely to have mistakes on their books. Without proper oversight and division of duties, these simple mistakes and financial ignorance can lead to or conceal fraudulent activities. Furthermore, because churches are less likely to pay for financial oversight from experienced professionals, fraud can be allowed to go undetected over a much longer period of time. Churches may not have the policies in place to protect themselves because they want to assume the best in people. Often church leaders and employees want to think that theft would never happen among a group of close-knit people who are rallied around a core set of beliefs. Additionally, well-meaning church members are more apt to overlook the rules or requirements that are in place for seemingly trustworthy friends and family-members, which can unknowingly open the door for fraud. To mitigate risk, churches should have a formal code of ethics, internal financial policies, and proper division of duties. An experienced accountant can be invaluable throughout this process – advising on what kinds of controls should be in place and effectively implementing them across the organization. Financial Planning Like businesses, churches must create an annual budget. However, unlike businesses, most churches require that the congregation vote to approve the budget. While this is not typically difficult to do, it can take longer, drawing out the budgeting process at the beginning of a new fiscal year. In addition to monthly budgeting, churches and businesses also need a multi-year plan to guide fundraising efforts and achieve strategic growth. Fundraising projections should be approached conservatively to allow for proper financial planning around long-term projects like building campaigns. Unfortunately, turnover among personnel tasked with managing finances can lead to inconsistent financial planning and reporting. While this problem can occur at any organization, it is more common at churches because they inherently have higher turnover in leadership positions. To improve consistency, most churches look for ways to streamline or outsource their financial needs. Outsourcing Ironically, the same financial complexities that make outsourcing bookkeeping and accounting functions attractive to churches also make them more difficult for churches to outsource. Churches looking for accounting software to aid less financially savvy personnel in their efforts often become discouraged when they realize that many out-of-the box accounting options need to be adapted for church use. Frequently, accounting software will have default settings that need to be modified to work for church applications. In some cases, ongoing modifications will need to be made to ensure that finances are being recorded and tracked correctly. For these reasons, many churches choose to outsource their booking to a professional who can ensure that their accounting is being done correctly, instead of trying to rig a solution to work for their needs. While some industries and business types really require the expertise of a certified accountant, smaller churches can often get by hiring a third-party bookkeeper if the individual has relevant previous experience. However, hiring a freelance bookkeeper should always be approached with caution because doing so does not provide the same quality assurances that hiring a financial professional at an accounting firm offers. For this reason, churches often prefer to work with established accounting companies to reassure their members that they are ethically and responsibly stewarding church finances. Need help? Contact Eric or Todd here today! |
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1/21/2020