It has been a long-time common practice for churches to “set aside” money for future spending. This has been particularly used in the area of property maintenance and improvements.
It has commonly been called “sinking funds”. The time to sink this practice has come – “sinking funds are sunk”
Once the decisions are made to “provide for” future property spending, the practice has been to create a journal entry:
- Debit: Property Provision Expense
- Credit: Property Provision (Liability)
Working with hundreds of churches for over 25 years, we have come across many of these situations where people think they are “saving up” for some future event. The irony is that in most cases there is no actual cash being saved.
We have found that this often creates a false sense of security. That is, people think they are doing a good thing and that they are “saving up for the future”.
A journal is entered in the accounts, a credit is built up in the liabilities section of the balance sheet. However, when the time comes to do the project there are insufficient funds in assets to pay for the desired spending.
The practice is actually misleading. Often the practice has been used to “smooth out” surpluses because some people believe that churches should not make a profit or surplus.
This practice goes against accepted accounting standards because:
- the liability created is not actually a liability, and
- there is no specific legal requirement to pay any money to an employee or 3rd party organisation.
Essentially, the liability is not real and therefore cannot be taken to account. It is simply an idea of something that may or may not happen and for values that are not substantiated.
This practice is discouraged by the Sydney Diocese of the Anglican Church and other church head offices and synods.
A sad story
We had the case with a particular church when we setup their new accounting system.
In the process of reviewing the balances brought forward from their previous records, there were some accounts in the liabilities called “organ fund”, “repairs fund”, “renovation of the vestry fund”. The previous bookkeepers and leaders had been diligently making regular entries to grow these “funds”. When we came to review these “funds” with their we discovered that there no funds at all, even for regular maintenance. It was a shock for all concerned.
The result required that they had to delete the “funds-liabilities” and adjust the accumulated funds – a significant adjustment.
So, the leaders had to reassess the way they would plan and prepare for those expected repairs and renovations that they had been talking about.
Our recommendation – how a church can save for future financial needs
If you want to save-up for the future, we encourage the following action:
- Create a 10 year capital/major maintenance expenditure budget
- Save money for the capital budget by budgeting for surpluses. It is necessary for churches to budget for profits or surpluses
- Transfer each annual surplus from operating bank account into a separate “Savings Account” (bank or trust depending on the practices of your denomination)
- In the period when you plan to spend the money on the larger items, include them in the church’s budget which will result in a deficit (a budgeted deficit). This means there will be on surprise overspending or deficit for that budget period.
- Spend the amounts as per your plan
Surpluses and Deficits – the happy story
Churches can budget for surpluses and deficits – it is honest and realistic.
This another aspect of raising the standard of financial management for your church – with transparency for the leadership and the members
Of course, things occur that you have not budgeted for, plans change. Consider if other expenses can be reduced to cover unexpected items. If this is not possible you may need to use the money you have saved for something else. In this case adjust the 10 year plan.
HAVE QUESTIONS ABOUT THIS BLOG OR ANYTHING ELSE RELATED TO RAISING THE STANDARD OF YOUR FINANCIAL MANAGEMENT CONTACT US: