ECCU Blog

If I’m looking for answers to the question above, I’m going one place first…for two reasons. That place is the ECFA (Evangelical Council for Financial Accountability).

One reason is because ECFA President Dan Busby and Vice President John Van Drunen are experts on matters like this. The other reason is because I have the privilege of addressing this topic with Dan and John in an upcoming ECFA webinar.

To lay some groundwork for our webinar discussion, I emailed these two experts a couple questions related to the topic. Here’s how they responded.

Mark: What are some “worst practices” to avoid when handling church finances?

Dan and John: If you are a church treasurer, avoid:

• Counting the offerings yourself. Try to have two other people count all offerings.
• Paying or reimbursing expenses without adequate substantiation.
• Putting off reconciling the bank account. Reconcile monthly.
• Signing a blank check and giving it to someone to make a purchase for the church.
• Vesting all financial management authority in one person (if possible). This can place a volunteer in a compromising position if allegations are made, regardless of the trustworthiness of that volunteer.

Mark: If there’s a CPA or tax expert in the congregation, is it wise to tap into their expertise on these issues?

Dan and John: A tax professional will often provide needed expertise as the church treasurer or by serving on a finance committee. So yes, having a volunteer with specialized expertise is often a real bonus for a church. It is wise to have this person work with others in the congregation who can step into the role in case he or she needs to relocate suddenly. This can also prevent burning someone out in their volunteer service.

If you’d like to join Dan, John, and me for this webinar, it’s titled 5 Basic Financial Issues for the Small Church Treasurer.  We’ll be presenting from 10:00 to 11:00 a.m. (PT) on Thursday, April 4, 2013.

For more information and to register, visit www.eccu.org/ecfa-webinar.

It can be challenging to stay abreast of legal and legislative changes affecting your ministry. What, for example, are you to make of recent legislation passed by Congress to avoid the so-called fiscal cliff?

To find out, I emailed a few questions to Dave Moja, partner and national director of not-for-profit services with CapinCrouse LLP. Here’s how he responded.

MBG: What’s the most important thing ministry leaders should know about the legislation Congress passed to avoid the fiscal cliff?

Dave: One thing is the extension of the deduction from an IRA rollover. Taxpayers who are 70½ years of age can roll up to $100,000 from their IRA without having to take it as income. This expired at the end of 2011 but has now been extended through 2013.

MBG: How about healthcare legislation? If a ministry isn’t familiar with its implications, are there a couple first steps they need to take in response to it?

Dave: There are several items here. First, ministries need to make sure they are reporting health benefits to their employees on Form W-2. Next is the new 0.9% Medicare withholding on higher income employees. Ministries should make sure they are up to date on these rules for their executives.

MBG: Is there an update that you think might catch most ministries off guard?

Dave: Ministries should be aware of the new rules that take effect in 2014 with regard to potential penalties.

One reason I asked Dave these questions is because he’s presenting an upcoming Christian Leadership Alliance (CLA) webinar titled Need-to-Know Tax and Legal Trends and Updates. When I asked Dave for some important takeaways those who attend this webinar can expect, here’s what he said:

“We will summarize what to expect in 2013. Also, we expect several IRS clarifications this year. These include changes to the charitable contribution deduction, unrelated business income stipulations, and changes to Form 1023, the exempt application process.”

This webinar will be presented on Thursday, March 28, 2013, from 9:00 to 10:00 a.m. (PT). For more information or to register, visit www.eccu.org/cla-webinar.

Before the economic downturn, many churches thought that growing attendance translated into greater giving. And often, it did. So lenders were inclined to look at attendance growth when evaluating how much new debt a church could handle.

But what has the recession taught us? Is this a valid criterion for determining the loan size a church can handle today? To find out, I asked Jeremy Moore, one of ECCU’s regional directors, a couple questions.

First question: If a ministry is growing rapidly, it seems reasonable to expect a lender to consider their potential for greater giving when determining the amount of money that ministry qualifies to borrow. Is that how commercial lenders see it? Why or why not?

Jeremy: One thing we learned in the downturn was that relying on continued growth in attendance and giving is dangerous. Lots of ministries that struggled to meet obligations ended up there because of their expectation of continued growth. While it’s certainly good to hope and plan for growth, one must also be careful to build in margin and have contingency plans in place in the event that growth doesn’t materialize. In today’s market, lenders (including ECCU) rely almost exclusively on historical results when determining a ministry’s ability to service future debt.

Second question: Cash flow can become a problem for any ministry. Can it be a problem when a ministry is applying for a loan? Why?

Jeremy: Cash flow is important for all kinds of reasons. One is because a ministry that manages cash well has the ability to react to unexpected opportunities and challenges without unnecessarily jeopardizing their ongoing ministry. From a loan perspective, lenders are typically looking for borrowers who have built margin into their cash flow. This is why having the ability to comfortably make mortgage payments should be budgeted before the loan application process begins.                                

I asked Jeremy these questions because he and two of his fellow regional directors will present a webinar on February 21 titled How to Look Like a Healthy Borrower. All three of these men have a wealth of experience gained by working with ministries during the recession and helping them return to financial health.

To wrap up, I asked Jeremy what people can expect to learn by attending this webinar. He simply said, “They’ll learn how to look and act like a borrower before applying for a loan.”

If you’d like more information about this webinar, you’ll find it here.

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.

Before mid-2008, most ministries had little trouble qualifying for financing. If they met a lender’s criteria, they were deemed a healthy borrower and it was simply a matter of time and paperwork before the needed funds were in hand.

Then the Great Recession hit, and when it was over, the definition of a “healthy borrower” had changed dramatically. I asked Mike Boblit, one of ECCU’s regional directors, a couple questions about this dramatic shift.

First question: What is one criterion used to underwrite loans that is dramatically different today?

Mike: I’d say the debt coverage requirement. Prior to 2008, if a ministry didn’t have past cash flow statements that demonstrated their ability to make mortgage payments of a certain size, they could meet this lending criterion by presenting a strong budget. Meaning, if their budget showed how they could cut other expenses to make a new mortgage payment, that would satisfy the debt coverage requirement. Today, borrowers must demonstrate, from historic cash flow statements, that excess funds are available to make a new loan payment.

Second question: During and since the recession, the term “tight credit” became commonplace. What does it mean and what is one significant way it has affected ministries?

Mike: Tight credit can be interpreted a number of ways. One is lenders being “tight” about lending money, with “tighter” borrower criteria. This has certainly affected ministries by making it difficult to find a willing lender or more difficult to qualify for a loan. Another way to look at “tight credit” is in reference to ministry borrowers. In this case, it means a ministry is highly leveraged. This looks like a loan payment that is 30 percent or more of a ministry’s income, which creates a tight budget that limits the ministry’s ability to make choices about how they use ministry funds.                                  

I asked Mike these questions because he and two of his fellow regional directors will present a webinar on February 21 titled How to Look Like a Healthy Borrower. Besides their lending expertise, all three of these men gained a wealth of experience by working with ministries during the recession and helping them return to financial health.

When I asked Mike what people could expect to learn by attending this webinar, here’s what he said:

“We would expect attendees to have a better understanding of how a lender will evaluate their ministry’s ability to qualify for a loan. In other words, the criteria a lender will use to make lending decisions. Additionally, by understanding these criteria, attendees will have a better idea of how to prepare financially to borrow funds if their ministry’s strategic plan includes purchasing or building a new facility and using a loan as a portion of the funds to accomplish this.”                                                                                                      

If you’d like more information about this webinar, you’ll find it here.