Spending Church Money
By Daniel Busby
Churches are often long on ministry potential but short on cash. While for-profit organizations are primarily concerned with making a profit, not-for-profit organizations, such as churches, are concerned with spending available resources wisely.
One important measure of a church’s fiscal credibility is its ability to stick to an approved budget, especially in its spending. While there must be allowance for expense variations from the budget, a reason able, consistent pattern of expenses reassures members their money is being used wisely. A lack of fiscal integrity, on the other hand, will breach donors’ confidence and
negatively impact giving.
Often the pastor is the interpreter of the church’s financial condition to the church, providing information on both revenues and expenses through the bulletin and from the pulpit. But behind the pastor’s role as spokesperson must stand a complete and valid system for collecting and spending money.
Building In Spending Controls
There are three key elements for controlling the disbursement of church funds: (1) The person who approves purchases should not pre pare checks for payment; (2) the individual who prepares the checks ideally should not be authorized to sign them; (3) the person authorized to sign checks should not be the person who approves purchases or payments.
In many small churches, one person performs all three of the above procedures. At a minimum, however, the people who count the weekly offerings should be different than those who pay the bills. But it is better to segregate the functions of purchase approval, check preparation, and check signing to improve control over the disbursement of funds.
In some situations, it may be wise to require two signatures on every check or on checks over a certain amount. The dollar level (for example, $500, $1,000, or $5,000) will vary according to the size of the church. The need for a policy of more than one signature should be determined by the level of control a church has over its fund expenditures. For example, if a larger church has a business administrator on staff that approves purchases, and all check requests require the approval of the church treasurer before checks are written, one signature may be sufficient for most checks. In most churches, one signature is adequate on checks of a modest amount. However, if a church does not have a budget and there are no written procedures for expending funds, two signatures on all checks can help offset other controls that are lacking.
Access to the church checking account should be limited generally to no more than two or three people. At the same time, having more than one person authorized to sign checks is useful when the treasurer is on vacation or otherwise unavailable. The authorized signatories, however, should not include the pastor or associate pastors. This would be a serious breach of good internal control.
Blank checks should never be signed. If small purchases are needed, the petty-cash fund should be used. When larger immediate expenditures are required, payment should be handled through open accounts with vendors or the church credit card. Otherwise, the expenditure should wait until an exact amount can be determined and documentation is available.
One bank account will be sufficient for a church if the accounting records distinguish the various types of funds (such as operating, building, and scholarship). However, if the church has trust or endowment funds, it is generally best to handle these funds through separate bank accounts.
How effective is a budget in controlling spending? The church bud get provides a general guide for expenses, but it is not a straitjacket beyond which expenditures cannot be made. Unexpected expenses often cause certain budget lines to be overexpended. For example, if the plumbing malfunctions in a church rest room and the maintenance budget has been fully expended for the
church year, it is doubtful that the repair should be postponed to the next fiscal year.
It may be possible to compensate for overspent budget line items by underspending other lines. However, in some cases, the unforeseen expenses are so great that the entire expense budget is over the projections. Some churches require that expenses over budget receive specific approval by the church governing board.
Defining a Spending Policy
There are a number of practices a church can consider adopting in its spending policies. Here are a few:
– Treasurer term limitation. Limiting the treasurer’s term to three years is often a good idea. This gives incumbents a needed break and provides opportunities for other qualified people to serve. It also protects the church from traditionalizing practices that may not be in the church’s best interest.
– Bank signatories. The board should annually adopt a resolution that authorizes the church’s check signers for the year. Otherwise, there may be individuals authorized on the bank signature cards who are no longer church officers.
– Benevolence fund. It’s good to establish criteria on who may receive monetary assistance through the church, and to adopt a policy detailing how the funds will be disbursed. A formal board-approved benevolence fund is an excellent method for handling gifts earmarked for needy individuals.
(Contributions that qualify as a charitable deduction must be made to a church or other qualified charity. Contributions made directly by a donor to needy individuals are not deductible.)
– Accountable-expense reimbursement plan. A church can save income tax dollars for ministers and other staff members by reimbursing ministry-related expenses under an accountable expense-reimbursement plan. A formal plan should be adopted by the governing board that outlines the procedures for providing expense advances, repaying excess advances, and reimbursing expenses.
Any advances, allowances, and reimbursements that do not qualify under accountable-expense plan rules are considered additional income for ministers and other church staff members. They may not be deductible.
– Travel expenses. Churches need to develop basic travel policies for ministers and staff. These may include:
-Type of payment: Will actual travel expenses be reimbursed or will the church use a per diem method? Will the church reimburse the use of a personal vehicle, and, if so, at what rate per mile?
-Type of transportation: Will the church pay for air travel and under what circumstances?
-Family travel: Will expenses be reimbursed for spouses and children? If so, how will the expenses be allocated? How will reporting to the IRS be handled by the church?
Setting Up a Payment System
One of the most important principles of disbursing funds is to pay virtually all expenses by check. (The petty-cash fund is the exception.) Consistency is the key. It may be tempting, for example, to use cash from a Sunday offering to pay an honorarium for a speaker that spoke that day, but offerings should always be deposited to the bank intact-without any cash withdrawals.
A good rule of thumb is that all cash expenditures should be made through petty cash, and all major payments should be made by checks drawn on a bank account used only for church transactions.
While some churches still write checks manually, increasingly churches are using computer financial software. Either way, the checks should be preprinted in consecutive numbers. All spoiled checks should be marked “void” and kept on file for review during the annual audit. If the church uses a manual checkbook, it should be a large, desk-type checkbook with three checks
to a page and large stubs on which to write a full description of each payment. As each check is written, the date, payee, amount, account number, and purpose of the payment should be entered on the stub. A running balance of the amount in the bank is maintained by subtracting the amount of each check from the existing balance shown on the check stub. If computer software is
used for making payments, expense types are distinguished by account numbers, and checkbook balances are obtained by printing out a check register.
Some churches use voucher-type checks (manual or computerized). The voucher portion is used to describe payment and provide a detailed breakdown of the accounts to which the expenditure is charged. A duplicate of each check can then be retained in the church’s accounting files.
Banks periodically return canceled checks (or photocopies of them) and a statement of the church’s bank account. Reconciling this statement with the check register without fail is an important step in keeping accurate records.
How to Pay the Bills
Most bills can be paid once a month. Payments should be based on original copies of invoices and other supporting documentation; otherwise it is too easy to pay the same item twice. Payments should not be made from month-end statements, since typically they do not show the detail of services or products provided.
When a check is written, the supporting document should be marked “Paid” and the date and check number recorded on it. If checks are prepared for the treasurer’s signature by someone else, the treasurer should see the supporting document before signing the check. The supporting material should then be filed in a paid-bills file, in alphabetical order by payee. Checks should never be
made payable to “Cash,” since it is essential to know for what purpose funds are being used. However, issuing checks to “Petty Cash” is acceptable when replenishing the petty-cash fund.
To effectively manage cash flow, checks should be written only when there are funds available to cover them. Some churches write checks when bills are due and then hold those checks for days, weeks, or even months until sufficient cash is available to release the checks for payment. This confusing practice makes balancing the checkbook and reconciling bank statements complicated and difficult.
Another entangling practice is to predate or postdate checks, which results in unreliable accounting records. For example, if a church year ends on June 30, a check prepared on June 20 and postdated to July 5 could be used to try to cover a year-end budget shortage in a cash- basis accounting system (this would not impact an accrual-accounting system). Conversely, a check issued on June 28 relating to a purchase that will occur after July 1 could be written in an effort to “use up” budget money in the current year. If expenses are not consistently recorded in the correct year, financial reports will be unreliable.
Other considerations in paying bills include:
– Approval of expenditures. How a church approves the spending of its money may depend on its size. In a small church, the treasurer may be authorized to approve expenses if funds are available in an approved budget.
In a larger church, an elaborate system of expense approvals may be necessary to manage disbursements.
Although every church should have a budget, many don’t. When there is no budget, the treasurer must use his or her judgment as to the appropriateness of an expense item and must also determine whether funds are generally available. This is an unfair position in which to place a treasurer.
It is good policy to have the church board provide authorization for all expenditures of funds. A standing authorization may be provided for certain routine items such as salaries, fringe benefits, utilities, and debt-amortization payments. But this standing authorization should be done through a resolution that specifies exactly what is authorized.
Many expenses relate to church departments (Sunday school, children, youth, seniors, maintenance). Good fiscal policies often require the approval of a department representative before an expense is paid.
– Use of purchase orders. Purchase orders authorize the expenditure of funds within dollar limits for specified items or services. They are based on purchase requests submitted by church staff and volunteers. Purchase orders are generally submitted to the treasurer, who issues them only after the purchase request is compared to the appropriate budget line item to determine
if funds are available. In this way, they are a good system for keeping purchases within approved limits. Purchase orders also allow for directing purchases to specific vendors, thereby providing for the possibility of price discounts. Many larger churches find purchase orders helpful.
– Documentation of expenses. Every check should have some sort of written document to support it-an invoice, petty-cash voucher, travel expense report, payroll time sheet, and so on. There are some instances when written documentation may not be required. For example, church policy may state that no documentation is needed for travel-related expenses for individual items of
$25 or less (other than air fare or motels). This type of policy is a reasonable one and is within Internal Revenue Service guidelines.
There may be other good reasons why written documentation is not available. The treasurer must have the discretion to determine when the lack of documentation is acceptable. For example, it is usually sufficient when paying an honorarium to have only a written check request indicating the date of the speaking engagement. Or a pastor may have lost an invoice for a ministry expense he or she paid person ally. If the amount requested is reasonable in relation to the expense, a written explanation of the item and the reason the documentation is missing should be adequate.
– Keeping records. All checks that are written should be recorded in a cash-disbursements journal. The journal may be prepared manually or by computer. Manually prepared cash-disbursement journals should have an adequate number of columns to distribute the major expense categories. It is helpful to use “total” and “detail” expense columns to create a double-entry posting and
– Expense reimbursements to church staff Expense reimbursements often create special concerns for churches. Although some staff members may think the mere listing of types of expenses provides sufficiently detailed documentation, more detailed information is necessary for adequate documentation. If ministry miles are being reimbursed, a daily log of ministry versus personal miles should be submitted to the church treasurer, with commuting miles between the church and the minister’s residence categorized as personal.
Expenses for entertaining church-related people should reflect the date, ministry purpose, and names of those entertained-generally on the receipt itself (which states the place). Receipts may be inappropriate, however, for meals prepared for entertainment at the minister’s residence, because food was purchased relating to personal meals as well as ministry-related entertaining.
In such cases, a reasonable cost- per-meal amount should be set and used as a basis for reimbursement.
– Paying workers. When payments are made to people who work for the church, the status of the person as an employee or independent contractor must be determined. This applies to every pastor, secretary, janitor, musician, and day-care worker who receives remuneration.
A worker’s status determines what federal, state, and local laws need to be followed in paying the worker. For example, employees receive a Form W-2 at year-end, while independent contractors receive a form 1099-MISC. Also, employees are often subject to state worker’s compensation laws, but independent contractors are not. The differences are many and important-enough so, that it is a wise practice to seek competent tax counsel about any gray areas, to avoid legal problems.
Avoiding Misappropriation of Church Funds
It is sad that the subject of misappropriation of church funds even needs to be addressed. But church funds do occasionally disappear when proper financial controls are not followed. Those handling church funds are human and thus subject to temptation.
Misappropriation of church funds generally occurs between the time money is placed in the offering plate and when it is deposited in the bank. But it can also happen with cash disbursements. Any treasurer, if inclined, can find ways to manipulate the books to cover misappropriation. Checks can be written to fictitious payees and then cashed by the church treasurer. Or treasurers
can write checks to themselves and charge them to an expense account or offset them against offering income.
Ineffective administration can make the church nearly as guilty as the one misusing funds. When church leaders fail to enact prudent fiscal controls, they may help cause someone to stumble. Churches can protect themselves and their treasurers against misappropriation if they develop a board-approved, written set of procedures for handling cash disbursements, and consistently
determine that the procedures are being followed, typically as a part of the annual external or internal audit process.
In a unique way, pastors and church leaders are stewards of the resources of God’s kingdom. This demands of pastors their best efforts at making every dollar count. One way church leaders can spend ministry dollars with confidence is by adopting a carefully formulated purchasing strategy. Needs or Wants?
Because ministry resources are often scarce, the first step in wise shopping is to determine whether the purchase meets a bona fide need or only a want. Buying “wants” is not wrong, but such purchases should come from excess (discretionary) funds. How can one know the difference between a wise and unwise purchase?
– Never buy on impulse. Any time someone says an opportunity must be taken now or missed forever, it’s probably better to miss it. We mortals need time between a buying opportunity and a sale to consider whether the purchase is really necessary.
– Establish an accountability process. If part of a larger staff, church leaders can become ac countable for purchases by making themselves accountable to a fellow staff member-one who will not be inclined to affirm a purchase unless it is truly wise. The same can be done with a friend, a church member, or an associate at another church.
– Plan ahead. By planning ahead, we can buy in large quantities, which saves money by reducing both the cost per item and the amount of time spent shopping. It also allows us to take advantage of seasonal pricing (such as purchasing paint, building supplies, and other spring and summer items in the winter when demand is low and prices can be negotiated) and to take our time; since we aren’t pressured to make a fast purchase, we can spend more time researching to make sure we are getting the best product for the church.
– Buy informed. When buying something also used by profession al tradesmen, we can ask members of that trade what they would look for if it were their purchase. For in stance, a landscaper can say which lawnmower provides the most even cut for the least amount of maintenance, and even where the best buys are.
– Don’t make church member ship or faith the issue. Some church leaders feel strongly about purchasing from church members or other Christians whenever possible. How ever, several arguments bear consideration: First, we need opportunities to build natural bridges with unbelievers. What better time to model integrity and earn the right to share the gospel than when dealing with vendors?
Second, if something goes wrong or a product is faulty, it may be easier to resolve the issue if the vendor is outside the church. This helps us avoid building up bitter ness or ill feelings among our flock or staff.
Third, if the problem is not cooperatively redeemable, we are told in Scripture not to take our brother to court. But we are not given this restriction with unbelievers.
– Get three bids. Although this rule may feel like an exercise in futility, it enhances good steward ship. It also enables us to objectively negotiate a price that is reasonable for both parties. When negotiating, we shouldn’t be afraid to ask for a lower price or for extras to be thrown in at the same price. It’s surprising how often the seller agrees.
– Don’t pay unnecessary sales tax. Some states exempt churches and other not-for-profit organizations from paying sales tax on purchases. This should be investigated with the state government. Organizations that have paid sales tax unnecessarily have been pleasantly surprised at their newfound savings.
-Nick B. Nicholaou
While church expenses generally should be paid by check, there are some small-dollar items that are better paid through a petty cash fund, which reduces the need to write numerous checks for small amounts. The following steps can be used to establish and administer a church petty cash fund:
– Define the rules. Which expenses can legitimately be reimbursed from petty cash and which cannot? A church secretary may have different needs for small expenditures than the pastoral staff. We should consider all the potential users before setting guidelines.
The rules should be as specific as possible. For example, should pay roll advances be permitted from petty cash? Probably not. Items often paid from petty cash include postage stamps, small office sup plies, and delivery charges.
One person should be the primary custodian of the fund. The use of part-time staff may require one or two alternate custodians. Another approach that fosters greater accountability is giving each person a personal cash box.
– Communicate the rules. The rules must be communicated effectively (and in writing) before we can expect people to toe the mark. It’s good to spell out how the sys tem works so that everyone under stands who is entitled to what, and when. The written policy should be given to new staff members as part of new-employee orientation.
– Allow no exceptions. The rules for the fund must be uniformly applied, whether the fund is used by the senior pastor or the janitor.
A petty cash fund of $50 or $100 is often adequate for small churches.
Larger churches may have multiple petty cash funds of differing amounts in various departments. However, the number of petty cash funds and the balances in them should have practical limits to keep the funds from becoming simply an option for writing checks.
The size of the fund may be in creased or decreased from time to time as needed, but it should be sufficient to cover payments for a short period-several weeks or a month. If the fund is kept in a locked desk or file drawer rather than a locked safe, the smaller the fund, the better.
To open a petty cash fund, the church treasurer writes a check to “Petty Cash” in the amount deter mined for the fund. The check is cashed by the custodian of the fund, and the currency and coins are placed in a box or drawer.
As funds are disbursed from the fund, a petty cash slip or voucher (including date of the reimbursement, the amount, the purpose of the payment, and the signature of the person receiving the funds) is completed and placed in the cash box. If an invoice or receipt is avail able, it should be attached to the slip for filing. The petty cash slips are kept with the petty cash. At all times, the total of the unspent petty cash and the petty cash slips should equal the fixed amount of the petty cash fund.
When the cash in the fund is get ting low, the beginning balance of the fund is reconciled to the ending balance. If the cash and the vouchers in the fund do not equal the original amount of the fund, an adjustment for “cash long” or “cash short” is made. A check is then written, again payable to “Petty Cash,” for an amount equal to the expense slips. The reimbursement
brings the fund up to the fixed balance. Church expense accounts are then charged, based on the various petty cash expenses.
For good internal control, the church audit committee should make occasional surprise counts of the petty cash fund.
-Daniel D. Busby
Holck, M. 1986. Complete handbook of church accounting. Englewood Cliffs, N.J.:
Pollock, D. 1993. Business management in the local church. Chicago: Mondy. Vargo, R. 1989. Effective church accounting. New York: Harper & Row.
This article may not be written by an Apostolic author, but it contains many excellent principles and concepts that can be adapted to most churches. As the old saying goes, “Eat the meat. Throw away the bones.”