One thing many ministries discovered during the economic downturn is that they weren’t as financially solid as they thought. As revenue declined, their financial vulnerability became increasingly apparent. Loan payments, for example, that once seemed realistic suddenly weren’t.
One way ECCU responded to this situation was by forming a new team to help struggling member ministries become financially healthy again. I asked Don Hughes, who led that team and is now one of ECCU’s regional directors, a couple questions about what we learned from this experience.
First question: By working with ministries that struggled financially during the recession, you discovered a link between strong leadership and financial health. Is leadership really that important?
Don: When it comes to financial health, solid leadership is not just important, it’s essential. We’ve learned that ministries with well defined organizational structures, appropriate levels of true accountability, and leaders who have transferable educational and business skills tend to be highly effective. These ministries don’t react to economic changes, they actually plan for them. Their strong leaders translate the ministry’s vision and goals into a workable budget that becomes a tool to help the ministry meet its financial obligations and continue to pursue its mission. Their disciplined financial leadership also includes implementing appropriate financial controls, closely monitoring and managing the ministry’s financial position, and making course corrections to stay on track.
Second question: How does a ministry decide how much debt is too much for them?
Don: This can be a complicated question to answer, but the first step should be to consider where their vision is taking them and whether acquiring debt is the most effective way to achieve that vision. Assuming it is, they’ll need to take a comprehensive look at their income. Based on historical data, is it reliable and sustainable? Is it stable, growing, or declining? They should then evaluate all their expenses and other financial obligations. This information will reveal whether there’s enough margin (positive cash flow) in their budget to maintain adequate reserves and financial flexibility. For churches, some experts use these budgeting benchmarks: Less than 35 percent for debt service, less than 35 percent for salary-related expenses, and at least 30 percent for liquidity and ministry. These are not absolutes—and certainly not applicable to all ministries—but they do provide a starting point for a “right-sized” debt discussion.
I asked Don these questions because he’ll join two of his fellow regional directors to present a webinar on February 21 titled How to Look Like a Healthy Borrower.
If you’d like more information about this webinar, you’ll find it here.