Cash Flow Made Simple

By: David R. Pollock

Happiness is positive cash flow – at least for church administrators. So how can a church increase that happiness?

Proper management helps. Since cash flow describes how and when money comes into the church and is spent, cash-flow management involves projecting income and expenses with the goal of paying bills on time and creating a surplus for growth.

Key: Income and expenses are two rather difficult beasts to tame in many churches, so how do we do it? Through forecasting. It’s a lot easier to go with the flow when we know where it’s going.

* Making Informed Guesses

Forecasting, to be more than mere guessing, requires a method to provide accuracy. Best: Track giving patterns over the last three years to evaluate the level of revenue and expected changes.

* Plotting Income

Use graph paper to draw an income graph for three, overlaid twelve-month periods:

– Draw a vertical axis (line) and label it INCOME

– Make the top of the line equal to your total annual giving, and divide the line into equal dollar-amount increments, beginning with $0.

– Draw a horizontal axis with 12 equally spaced marks to represent the months in the three-year period.

– Collect income information from the church checkbook, the income journal, or bank deposit slips. These will show when you received money and how much you took in.

– Plot on the graph the income for the first month.

– For each successive month, add to the total the income generated that month, and plot the point the graph.

– Connect the points to form a line rising from lower left to upper right.

– At the end of the first year, repeat the process in other colors for the next two years, starting from zero each time.

Alternative: Use the graphing ability of a computer spreadsheet.

* Plotting expenses

Repeat the graphing process for monthly expenses, using information from your church’s checkbook, disbursements journal, or other record of paid bills.

Simply add up the expenses for each month and connect another set of points on the graph.

* Looking for variations

Aside from seasonal patterns (i.e., lower income in the summer), other factors may cause exceptions to the normal flow of giving and expenses. Examples: A building program may produce a surge in offerings, or a large Christmas pageant may occasion significant expenses:

What to look for:

– High and low income months

– Seasonal periods of greater spending

– Points where income is low and spending is high, and vice versa

– Overall trends: Is giving up each year? Plateaued? Falling? How much? Is one year quite different from the others? Why?

* Projecting next year’s graph

Using the data from the three-year historical graph, you can hazard estimates of the coming year’s income and expenses. Note: Except some variations in the future, just as you found them in the past, but this process will help make a reasonable cash-flow projection.

* Finding Trouble Spots

This cash-flow graph provides another important piece of information: the break-even points, where income and expense lines cross. At these points you’ve taken in and spent equal amounts of money. Note: Ideally, both the expense and the income lines would travel identical paths on the graph in a continual break-even mode, but this is hardly ever the case. Most churches
hope to keep the lines reasonably close, breaking even over time, if only at a few given points.

What else to look for:

*Negative cash flow

Where the expense line is higher than the income line, the church is “in the red;” it has spent more than it has taken in. Note: This isn’t always a sign of problems, but it obviously calls for attention and cannot continue indefinitely.

* Positive cash flow

When the income line is on top, the church is “in the black” – a comfortable place to be. Positive-cash-flow months prepare the church for times when outlays outstrip income.

Key activity: Keeping your finger on the pulse of cash flow. You need to understand how and when funds come in and go out, paying careful attention to places where the flow is disproportionate in either direction.

* Heading off trouble

What can you do about expected cash-flow problems? Here are two suggestions:

– Forward-thinking budgeting

Create two or three spending plans, because a single budget doesn’t allow for setbacks, unless surpluses are budgeted.

How it works: You budget at a certain rate, but plan to cut expenses by, say 10 percent at a specific date if income isn’t keeping up with outlays. Other ideas:

– Reduce the number of mailings

– Charge for events that previously were free

– Delay purchases

Key element: Knowing that cash flow may be a problem, the budget includes alternative spending plans to match the income.

* Planned saving and spending

Almost every church experiences dips in income during the summer. A wise cash-flow manager will:

– Set aside a cash reserve during the fat months to cover the lean ones.

– Phase discretional expenditures to take place in high-income months.

(The above material appeared in the September/October 1992 issue of Christian Management Report.)

Christian Information Network