Finance 101

Your accounting and finance cheat sheet

Learning the language

There are few things in life that bring on a cold sweat faster than being handed a page full of numbers you don’t understand - looked at expectantly for your profound insight while you’re trying to Google ‘amortisation’ under the table. Accounting and finance can be like another language - one that no one seems to feel the need to translate before they launch into impassioned debate about accruals and depreciation. And even if you have experience with financial management outside of ministry, it isn’t always clear how the concepts translate.

Our goal for working with you is not only to help shoulder the burden but also to provide you clarity and confidence about your finances. We have broken down some key accounting terms and concepts - hopefully helping to connect the dots on what they really mean for your ministry.

Deciphering reports

Chart of accounts

Your chart of accounts is the overall framework for organising your finances. It is a list of all of your ‘accounts’ - not in the sense of bank accounts - but categories for you to divide up and understand your income, expenses, assets, and liabilities. For example, you might have income accounts to separately track regular tithes, annual offerings, and cafe income. You might have expense accounts that track Sunday expenses, youth activities, and office utilities.

Each account would carry a specific amount budgeted for the year, and then serve as a ‘bucket’ for transactions to be recorded against. As money goes in and out across the year, each transaction will get placed in the right bucket - so that you can see how much you have brought in or spent in each, against the budget you set.

While there are a handful of guidelines for creating your chart of accounts from an accounting perspective, for the most part this structure should be based on what you are going to find useful. Just like a personal budget, it should be broken down in the way that is easiest for you to understand, predict, and manage spending under. Your chart of accounts will also extend to your balance sheet, with accounts for assets and liabilities. However, these categories are generally more standard and unlikely to change much between organizations.

Profit and Loss (or Income and Expense)

This report tells you the money that you have brought in and spent over a period of time - generally a month or a year. This is one of your key reports to stay across on a monthly basis, as it gives insight into financial performance - whether you are moving forward (generating a surplus) or backwards (sustaining loss) with your money. We tend to call this report ‘Income and Expense’ and label the bottom line ‘Surplus / Deficit’ as churches don’t exist for profit - though we of course want to generate surpluses to broaden impact and have a sustainable ministry. The key sections in this report are:

Income: the money you bring in - e.g. tithes, offerings, and any commercial income like venue rental or day care fees.

Expenses: the money you spend - e.g. venues, catering, staff, office, travel

Surplus / Deficit: the bottom line - what is left over when you subtract all expenses from all income. This is the line that really matters. It doesn’t matter how much you’re bringing in the door if it goes right back out. This is the line we want to maximize - either by growing income or shrinking expense.

Generally, each account line will include a couple of comparisons - the actual income, expense, or bottom line will be compared against the budget so you can see how you are tracking according to the plan. It may also compare to the prior month or year to give you a sense of how things are changing or trending. For a monthly report, we would usually also include a year to date actual and budget - to show context of how the overall year is shaping up.

Balance Sheet

Your balance sheet gives insight into your financial position at a point in time - usually, we would look at it at the end of the month or end of the financial year. This report is another key set of data that tells you about your financial standing and stability. The key sections in your balance sheet are:

Assets: the things you own - e.g. bank deposits, money owed to you, expenses you have paid for but not yet received, buildings, equipment. This is divided into two categories. Current assets are what you have available at hand, things that can be quickly converted to cash and used to pay your bills within the next year. Non-current assets are things like multi-year term deposits or investments, equipment, and land - valuable to own but requiring time to sell off if you did need cash. This difference gives insight into your liquidity - how easily you can meet your short term obligations. For example, if you have millions sitting in buildings but a low bank balance, you may have a strong financial position but still be at risk of not being able to pay your bills.

Liabilities: the things you owe - e.g. unpaid bills, income received in advance for things not yet delivered, employee leave balances you may need to pay out, debt and mortgages. Again, this is divided into current liabilities - things that will need to paid off within the next year, like outstanding invoices - and non-current liabilities that span more than one year, like mortgages.

Equity / Net Assets: what is leftover when you take what you owe from what you own. This is sometimes called your net assets - the real value of the resources that you have at your disposal.

Your balance sheet gives important information about your financial standing, and will be one of the major things that a bank might look at when deciding to lend to you. However, it doesn’t tend to move as much from month to month. What is more important is the general trend across many months or years, which shows the direction and speed in which your equity is changing.

Making sense of policy

Delegated financial authority (DFA)

A delegated financial authority is a fancy way of describing how much each person is allowed spend. It sets out the limits of financial decision making for each person, role, or level of leadership. For example, a young adults pastor might carry a DFA of $100, meaning they can make a call to spend up to that amount on something outside of budget - but anything over needs to be approved by someone with a higher DFA. This will generally increase incrementally through a structure, all the way until the board, who holds the ultimate responsibility, and therefore authority, over financial decisions. This is a key policy to have in place to ensure that spending is managed and that the boundaries for each role are clear.

Accruals

Accrual accounting is a way of distinguishing between cash flow and actual financial movement. Cash accounting looks purely at what cash has gone in and come out over a certain amount of time, accrual accounting looks at when income was actually earnt, and when expense was actually incurred - even if no cash has yet passed hands. This means that if you made a large order for production gear right before the end of your financial year, even if you only pay it the next year, the bill is going to need to show up in your reports for the year.

This is usually a more accurate way of accounting (though it is also important to track cash flow, especially if you’re a bit short of cash). It generally doesn’t make much of a difference for churches, because tithes and offering income is simply given when it is given, rather than earnt earlier and then paid off later - and expenses are for the most part quite routine across the year. However, it is the method of accounting that is required for most churches in New Zealand - any that have revenue over $140k - so it’s useful to understand what it actually means.

Depreciation

Depreciation is a way of recognizing that your assets gradually degrade and lose value over the years. You are essentially ‘using’ up your assets each year - and charging yourself for it. It is not a cash movement as nothing actually changes hands, but instead a calculation that is made and recorded on both the Income and Expense report and the Balance Sheet. For example, you might own a sound system that cost $50k. When you first buy it, your bank balance drops by $50k, but your fixed assets increases by the same amount because you now own something worth $50k. However, it isn’t going to remain worth that forever. If we know it will only last us 5 years, we recognize that it is basicallly going to lose $10k of value each year. That $10k will show up on the Income and Expenses report as an expense, even though no cash was spent on it - and as a decrease in your assets on the balance sheet because you no longer own a brand new $50k sound system, you now own a used $40k one.

It might be tempting to ignore this in your budgeting because it’s not a ‘real’ expense, but that’s a trap. Think of it is as a form of budgeting for replacements - when that sound system dies in 5 years, you’re going to need find a spare $50k to get another one. If you’ve been budgeting $10k of depreciation for the past five years, then that’s easy - the cash should be there. If not… it might have to be another special offering…

Segregation of duties

This concept simply reflects that fact that power corrupts... and absolute power corrupts absolutely. Segregation of duties policies help avoid any one person having complete control over your church’s finances. Just like we don’t want one person to act as judge, jury and executioner, we don’t want one person making the decision to spend, processing the payment, and then recording the transaction. We tend towards trust in churches - but finances is too often a test and it’s best we take temptation off the table with safe processes and policies.

One key example of this in practice is dual controls - requiring two people to authorise money leaving the bank account, two signatures on major contracts or expenses, and two people to count and record offerings. In churches, we often have staff and teams that include married couples and other family relationships - so it’s important to make sure that the two people are unrelated.

What next

Sometimes you need a translator to bridge the gap. We want to make sure that you understand the numbers, and what they mean for your church. We help to break down your finances and report them clearly and consistently - in a way that makes sense to you and your team. Our goal is to help make the most of the time you do spend on finance - so you can focus on creating value and setting direction, not getting stuck in doing admin or deciphering data.