ECCU Blog

Did you know that we found a direct correlation between a ministry becoming financially distressed and maintaining adequate cash reserves? Certainly makes sense that if you have a buffer, your ministry is less likely to focus on survival. So why don’t more ministries maintain adequate reserves?

Just as in our personal lives, putting money aside takes intentionality and discipline. Helping a ministry understand why cash reserves are so important is a first step in this process. Here are the three main reasons a ministry needs to maintain cash reserves:

Cash Flow Fluctuation. Revenues and expenses don’t always match up (or come in and go out at the same time). For example, many ministries will get a significant amount of donations at year-end and need to rely on those funds to pay expenses that occur during the remainder of the year.
Unplanned Events. We all know “things” happen that we haven’t planned. Even the best prepared budgets don’t anticipate everything that might occur. Having cash reserves set aside is critical to being able to cover these items when they occur.
Potential Opportunities. What opportunities, if presented, would you want the ability to act on immediately? To take advantage of a God-given opportunity, you will most likely need access to some funds before you have time to raise them.

Just as each ministry’s mission is unique, the appropriate amount of cash reserves is also unique to each ministry. It takes discipline to determine your ministry’s needs. Start now, or you may experience unnecessary pain and risk troublesome problems that could have been prevented.

Check out our white paper Cash Reserves: How Much Is Enough? It will help your ministry determine what level of cash reserves is appropriate for your ministry.

If you are like me, you’ve probably had enough of all the media news surrounding the downgrade of U.S. credit by Standard and Poor’s credit rating agency. Yet there’s no denying that these are tumultuous times. The day after the DOW dipped over 600 points, I had to remind myself that the money in my retirement plan really isn’t my money in the first place and God is still in control. 

While it is critical that I maintain this perspective, it doesn’t mean that I should keep my head in the sand and not take responsible actions. For those of us managing ministries, we are stewards of the ministry and money he has entrusted to us. So, what appropriate actions should we take as we manage our funds and investments?

Preservation of Principal. Even in a changing economy, the fundamentals of managing our funds are still the same. We all know the tradeoff between risk and reward. The more reward we seek, the greater risk we take. For short-term ministry funds, including all our operating reserves, our primary goal and responsibility is the preservation of principal. This means that we don’t take undue risk with these funds. So, while S&P may have downgraded U.S. credit, it still represents the safest investment we can make. Deposits at federally insured credit unions and banks, as well as investments backed by U.S. Treasuries, are still appropriate places for these funds.

Adequate Liquidity. After preservation of principal, the next most important fundamental is maintaining adequate liquidity: Make sure you can access your funds when you need them. This doesn’t mean you have to keep all your funds in a checking account, but it does suggest that you evaluate when you might need your funds and keep the appropriate amount liquid for immediate access. An account such as a money market should give you this flexibility. Some financial institutions, like ECCU, even offer certificate accounts, which allow partial withdrawals without penalty during the certificate term.

Return on Investment. Evaluating the potential return on your investment should only happen after you have first ensured the preservation of principal and adequate liquidity. When you have comparable investment opportunities which satisfy the first two—and most important—fundamentals, then you can use return as a part of your consideration.

A word of caution: I know it is tempting to invest short-term operating reserves in stocks, commodities, or even precious metals. But I can tell you numerous stories of ministries that lost thousands, even hundreds of thousands, of donors’ gifts this way. It is appropriate for long-term investments to include such investments, but not your operating reserves.

So even while the markets fluctuate and negative news leaves us concerned, sticking to these fundamentals can allow us to stay focused on the ministry God has called us to accomplish.

We’re bringing up the topic of cash reserves again for one simple reason: It’s important. So important, in fact, that we created a free tool to help you discern if your reserves are adequate. Because inadequate reserves can translate into inability to pursue your ministry’s mission.

Case in point: We recently analyzed the financials from a representative sample of churches across the US, and 32% of ministries that experienced financial distress over the past two years maintained less than 51 days of cash reserves. On the flip side, 92% of ministries who maintained over 51 days of cash reserves didn’t experience any financial distress. (Distressed ministries are those that were past due on payments to vendors 60 days or more.)

That’s where the free tool comes in handy. We created an online recording of our recent webinar to help you understand:

• What makes up cash reserves
• Why reserves are important for your ministry
• How to establish a cash reserves target and begin building adequate reserves to reach it

You’ll also hear from a pastor whose church went through the process of building adequate reserves and how it benefited their ministry.

Not only is the webinar free, it’s easy. Simply visit www.eccu.org/cash-reserves-webinar. After providing some basic contact information, you’ll have an opportunity to view the webinar and to download the ECCU white paper, Cash Reserves: How Much is Enough?

Give it a listen and leave a comment letting us know what you found most helpful.

We have had the opportunity to analyze the financial statements of ministries across the U.S. in the past couple of years and we have found some helpful information worth mentioning.

Of those ministries, nearly 20% were deemed to be in financial distress. This meant that these ministry organizations were past due 60 days or more on payments to vendors in the past year.

The top correlation we found to becoming financially distressed was the amount of cash reserves maintained. 32% of the ministries who maintained less than 51 days of cash reserves became financially distressed. Conversely, 92% of those ministries who maintained over 51 days of cash reserves did not become financially distressed.

Now there isn’t any magic in 51 days of reserves specifically. That is just the number our statistical analysis showed to be a significant threshold. More importantly, each ministry should determine how much is enough for their unique ministry. For most ministries, adequate reserves would be something much higher than 51 days of cash reserves.

Financial distress can and will cause significant harm to your ministry. Active ministry is replaced by a survival mentality, cutting costs wherever you can. While it can be prudent to cut unneeded waste, cutting activities and programs which are critical to your mission takes away from you fulfilling your vision as a ministry.

We have written a white paper entitled, “Cash Reserves:  How Much is Enough?” which you can read or send to another friend in ministry. In this, we provide a framework which you can use to determine how much is enough for your ministry. In addition, we offer a free consultation for our members with one of our staff to help them work through a process to discover this important information. Click to view our free webinar recording: Cash Reserves: Why you need them. How to build them.

We recently asked ECCU’s Ministry Advisory Panel* (MAP) “How did 2010 year-end giving (December) compare to your budget expectations?” More than one third of panelists (34.3%) said that their ministries’ 2010 year-end giving was 5% or more below their budget expectations.

According to USA Today’s article, “Study: Churches inching back from recession,” larger churches have found it easier to recover from the recession than smaller ones. 

Additionally, ministries continued to meet the needs of their members and communities even with limited resources. 

How does your ministry’s experience compare with the findings of these surveys? 

* The MAP is composed of ECCU member and non-member ministry staff and leaders representing evangelical Christian churches, businesses, schools, and other ministries. This report was produced by ECCU’s research department. To join the panel, click here.