Obtaining properly prepared financial statements is an accounting best practice for all businesses, including churches and other non-profits. Unfortunately, many churches do not realize their significance.
Financial statements are reports reflecting the financial health of an organization. They are compiled from the daily tracking of funds coming in and going out. All organizations should follow generally accepted accounting principles (GAAP), using an accrual basis to record income and expenses when they are earned and incurred. However, many churches use a cash basis—recording income and expenses when they are received and paid—or a combination of both approaches.
A complete set of financial statements for a non-profit organization generally includes the following:
- Statement of Financial Position (Balance Sheet): assets, liabilities, and net assets (net worth) on a stated date showing the reader where the organization is financially and where it has been (what is owned vs. what is owed)
- Statement of Activities (Income Statement): income, including contributions and expenses over a period of time showing the reader what resources (income) were available to complete the organization's objectives and how the resources were used (expenses)
- Statement of Cash Flows (Cash Flow Statement): inflows and outflows of cash over a period of time coinciding with the Statement of Activities and Statement of Financial Position
Financial statements benefit your church in three important areas:
1. Providing Assurance
Donors want to know where their money goes. Providing an accurate statement of accounting for donations not only gives the donor assurance that their contributions are being used prudently, but it also protects your church by demonstrating how and when funds have been used.
2. Budget Planning
As you project income and expenses for the new year, reviewing past financial statements can give you a good idea of what giving might look like going forward. By understanding your current financial position, you’re better able to plan for the future. For example, if you want to fund a new ministry initiative, the information provided by the statements can help you decide when the best time might be and how it might be funded.
In addition, by analyzing the figures, you can discover ways to reduce expenses and increase cash flow. Because the financial statement is a reflection of financial decisions, if there are budgetary discrepancies, they can be identified and corrected. This evaluation process helps a church become financially healthy, providing a stable foundation to do the ministry they have been called to do.
3. Obtaining Financing
Financial statements help lenders evaluate their risk in lending to you. It’s important to obtain statements on a regular basis before you’re in the market for a loan, so any problems can be corrected well ahead of time. When it’s time to borrow, you’ll want your statements to reflect a healthy financial position. If they are incomplete or not in a standard format (GAAP), you may not be considered a good lending candidate. For example, if your current liabilities (payables) consistently exceed current assets (cash and receivables), a lender may conclude you have a cash flow problem that could result in an inability to pay back a loan. On the other hand, perhaps church attendance is up and giving has increased. Your financial statement will reflect the income and support your efforts to obtain funding. In addition, the amount of income, trends in giving, and how funds are spent all help a potential lender know how much a church can afford to borrow.
Seek out a licensed certified public accountant (CPA) or reputable accounting firm to prepare your statements. A CPA is required to keep up with current practices and standards. Do your research and take time to meet with the firm to discuss their types of services and costs. Accounting firms provide a wide range of services from daily bookkeeping to annual auditing. Depending on your number of daily accounting transactions and your needs, you can determine the best services and frequency of statements with your accountant. Most small churches and organizations do not need audited financial statements and may find that quarterly or annually compiled statements are sufficient. Quarterly compiled financial statements for a small to medium-sized church could cost from $350 to $500 per quarter. It’s a small price to pay for being able to present an organized, accurate financial picture of your church.