About those reserve funds

Last week I had a chance to be part of a conversation with a local church leader who was feeling some tension about reserve funds. One on side is the argument for strong financial reserves. I have heard discussion advocating as much as three months’ worth of expenses in a rainy day fund. On the other side is the approach that the best investment a church can make is in its people and programs, using funds to grow the church that in turn will make the church stronger financially, but at least be kingdom-oriented.

I’ll tell you right now that I completely agree with both sides. And therein lies the tension that this leader was feeling.

When determining a reasonable amount for a financial reserve, I suggest a two-step approach. The first is to determine what the immediate need is. Churches tend to need cash in one of two times in the year. The first is the end of the summer when donations may have lagged during vacation months and expenses pick up as curriculum and materials are purchased for the fall. The second is at the end of the year as a final accounting takes place and expenses that have been allowed to slide for a while are due, things like apportionment payments.

Take a look back over the last decade or so and see what the highest need has been. If by the end of the summer the most you have ever been behind is three weeks’ worth of expenses, then having a reserve of twice that, or a month and a half’s worth should be adequate.

If your end of the year deficits are sporadic and are generally made up for in the following year, the same approach can be used for those. But if you run a perennial deficit at the end of each year you really need to align your expenses with your income.

The second step is to determine your trajectory on the income side.

Take a look at the top 20 percent of your giving units. If you have 100 families in your church, do this with 20 of them, not the families that give the top 20% of your income. Rank these families from the largest amount to the smallest. Now give your best estimate on the age of those making the gift. Maybe you have exact ages in your database for them, but if you don’t, round your guess to the nearest five and don’t get mired in the details. Now rank their involvement in the church like a school teacher would, going from A to F. Someone who is in worship most Sundays and is otherwise quite active would get an A, a member who is spending more and more time as a snowbird would get a lower grade. Remember, these aren’t values judgment, just a way to organize something that is conceptual.

So what did you come up with? If all of these are over age 85 and no better than a C in involvement currently with the church, you have a problem. If they are all 50 or so and get an A for involvement the need for reserves is lower. The reality is that it will be in between these somewhere, but this will give you some idea about where your giving among current members is headed. This isn’t to say that a young giver can’t get a job transfer or get hit by a bus or that the elderly member can’t have another decade or more with you, but it gives an idea.

As an aside, if you’re wondering if you should be teaching people who are new to the church about tithing and other sacrificial giving, I imagine this analysis will give you a pretty strong nudge.

So now combine steps 1 and 2. You know historically what your reserve requirements have been, and you have some idea of where your giving is going. Are you likely to need more in the bank than you have in the past?

If you started reading this expecting to come up with a formula to tell you exactly how many dollars you need to have in your reserve account, it just isn’t that easy. But like anything else we do in the church, going into it with clean intentions and always with an eye to kingdom work should move you in the right direction.

As always, let me know how we can help with this.


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