Have you noticed how every area of expertise has its own vocabulary? Like car guys talk about horsepower and Bible translators talk about linguistics. So ministry banking guys talk about cash reserves and liquidity management, especially these days.
Maybe you’re not as fluent in this financial lingo as some, so I sat down with a real ministry banking guy, Mark Jones, and asked him to translate. Mark is a vice president and senior banking consultant here at ECCU.
Ministry Banking Guy: Mark, let’s start with liquidity management. If you had 25 seconds to tell somebody on an elevator what it is and why it’s important, what would you say?
Jones: Liquidity simply means available funds. The goal of liquidity management is to have enough funds available for current expenses and new ministry opportunities. Managing liquidity is tougher than it seems because income doesn’t always come in when expenses need to be paid. And we always have unexpected expenses.
In the U.S., inadequate liquidity is the main reason small businesses fail. At ECCU, we work with over 2,000 ministries, and for those experiencing financial problems in this economy, inadequate liquidity is a primary issue.
MBG: What if someone says, “But we can’t manage liquidity because we never know how much revenue will come in each week or month”?
Jones: No one can precisely predict income, but you can make good estimates. Start by looking at your past three years’ revenues and current income trends. This can help you predict future income. You also need to know how the economy is impacting your donors. You can use this data to create a cash flow forecast, which will help you determine whether you will have enough cash when you need it.
MBG: And what do you say to the person who thinks the way they manage liquidity is by spending every dollar that comes in on ministry?
Jones: People often follow this up with something like, “God will provide,” which is true, but the Bible also teaches us to set aside resources for lean times. There’s a healthy tension between these two biblical truths. The reality is, poor liquidity management can hinder a ministry’s pursuit of its mission.
MBG: Okay, how about cash reserves? What are they and what are they for?
Jones: Operating cash reserves are set aside for three main purposes—cash flow fluctuation, unplanned expenses or events, and potential opportunities. Funds earmarked for cash flow fluctuation are there to keep the ministry operating when expenses exceed income. As for unplanned expenses or events, a sudden loss of a key donor would be an example. Potential opportunities are things that align perfectly with your mission but aren’t in the budget.
You should also have a separate replacement reserve fund for things like resurfacing the parking lot or replacing an air conditioner.
MBG: Last question. What do we do if we figure out how much cash reserves our ministry should have but we just don’t have it?
Jones: The goal of going through the process I’ve just described is to identify a target liquidity balance. To better understand how to calculate that target and begin building reserves, I’d recommend reading our white paper, “Cash Reserves: How Much Is Enough?” And ECCU’s ministry development officers are always available to consult with ministries and help them set the right target liquidity balance.
How does your ministry handle the tension between setting aside reserves and using funds for ministry?