This post was last updated on April 28th, 2021 at 11:22 am.
Deciding which church accounting software to purchase is a difficult decision to make. Selecting the financial team that carries out the day-to-day operations of the church is equally as difficult. Both need to be reliable to ensure the church has the best available information to make financial decisions.
Accurate financial statements reflect assets, liabilities, and how income is spent, are essential to nonprofit organizations. Churches also need a strong technical support team they can rely on when difficult accounting questions arise. Although a good church accounting software can handle multiple designated funds, is it always best practice to create a fund for each cause?
We’ll explore all of these topics in the following sections and provide some solid advice.
Accurate Financial Statements for Churches
Churches are legally required to produce FASB compliant financial statements to maintain their 501(c)(3) status. Equally as important, they need to meet the non-legal requirements of their members. Since churches rely on donations, having financial statements that reflect a well-run, transparent organization is the goal of the financial team. We’ll review some of the issues that arise while producing the church’s financial statements, and how to make sure the church’s reputation stays above reproach.
Managing donations effectively
Members donate for several reasons. They may have a strong connection within the church, maybe they were inspired by a sermon, a particular mission, or giving generously just makes them feel good. Whatever the reason, they trust their donation will be used appropriately. The church has an obligation to report how these donations have furthered their missions.
Financial statements hold the key to transparency. One simple visual illustration, would be to display the raw numbers using a graph. A pie chart that illustrates the church’s spending on outside missions, building costs, salaries, community functions, and so on could go a long way.
Why should the church take the time to create these simple illustrations? Because open communication preserves the relationship between the church and its donors. For newer hesitant donors, it shows a need for the mission. It also provides creditability to the public, which helps to increase donations. Over time these illustrations can be coupled with ‘thank you‘ receipts for individual donations.
Tale of two churches
Let’s do a little role playing. We’ll call it ‘The Tale of Two Churches’. An individual donates the same amount to two different churches. Both churches thank the donor with a follow-up email or letter, which is an excellent way of increasing donations.
At the end of the year, each church sends a year-end statement to their donor. However, one church includes an insert that breaks down all the giving the church received and how it was spent. By providing this information the donor visually sees the positive impact of their donations and is overcome with the good feeling of generosity.
The past methods don’t work as well anymore
Decades ago, churches were one of few nonprofits, and members donated out of habit or spiritual obedience. Most didn’t question how the money was spent. Now with hundreds of nonprofits, people are researching organizations before making a decision to donate. Many are turning to watchdog groups and others like Charity Navigator, that research an organization’s adherence to governance, spending, and their stated missions.
Board members can make good decisions by choosing a church accounting software
Church board members must make short and long-range decisions based on resources. Many of these decisions have a far-ranging impact on the organization. They decide things like replacing roofs, heating systems, children’s programs, and so on. Having clear financial statements will help church board members decipher the financial health and make good decisions for the organization.
Not having the right information can lead to a disaster. Many things impact the board’s decisions. Knowing how much the church owes lenders, what expenses are due, and how much each fund has in terms of assets, are all important. These are all answered by financial statements like the balance sheet and profit and loss. Choosing a church accounting software that can produce accurate financial statements becomes very important to the board members.
Note on terminology: The proper terminology, in the nonprofit world for the balance sheet is, the Statement of Financial Position. The profit and loss report is called the Statement of Financial Activities.
Church exemption status
Churches benefit from being nonprofit organizations. Unlike most companies, churches are not taxed on the revenue they receive. However, the government can still review a church’s financial statements. One payroll mistake can open the church up to a full financial audit. It’s like opening a can of worms and the IRS is the can opener.
Financial statements affect bank loans
In the past, churches rarely applied for a standard bank loan. However, times have changed and it is becoming more common. While churches are nonprofits, banks require the same documentation on a loan application as they do with for-profits. Being able to provide accurate financial statements for approval is mandatory. After all, the bank is taking the same risk.
Transparency and public perception
We touched on this earlier in the tale of two organizations, but it needs further explanation. When donors, especially first-time donors, come to the church’s website, how do they know you are a reputable church? Does the church post the financial statements online? Or at the very least show them how donations are broken down into main categories by percentage?
From our experience, we can say that most church websites do not provide this information, or if they do, it’s buried. In contrast, the donate button is very visible for website visitors. We aren’t advocating an organization show the public anything that’s private or confidential. However, numbers reported by major categories satisfy most people’s curiosity.
Lastly, we need to address the watchdog groups. Typically this is for larger organizations that have a lot of resources. Public watchdog groups do a lot of good, however, if you have ever been on the receiving end of their criticism, you may not think so. Granted, they do expose a lot of fraud which benefits all nonprofits. In that respect, they do a lot of good. Think of them as a necessary evil.
There are many other reasons besides these five, to have accurate financial statements. With that said these five are very compelling and we haven’t even discussed the necessary requirements that the IRS and other entities impose on churches in regards to financial statements. These reasons look out more for the church than anything else, but don’t touch on the legal requirements.
Managing Assets on the Accounting Books
Some churches try to get by using only a checkbook register for their ‘accounting books’ only to find out later that it doesn’t work. Checkbooks are good at only one thing — recording the ‘in’ and ‘out’ of money. What they can’t record is an asset’s value- like buildings and land- or how much the organization owes to a lender.
Let’s use an example that’s closer to home. Does your personal checkbook record the value of your car or house? Of course not. Likewise, any outstanding balances on mortgages or loans aren’t found in the checkbook register either. The same thing happens in a church with regards to their checkbook. An incomplete picture develops when all account values are not recorded.
How do we record these assets and liabilities? The chart of accounts is the answer to recording everything the church owns and owes. The checkbook register fails to track balances other than its own. The intention of the chart of accounts is to pull all these accounts onto one report.
The incomplete picture
Here’s an example of an incomplete picture using the checkbook register. Liabilities can be anything from payroll taxes, benefits, mortgages, loans, credit card debt, or accounts payable. Using the checkbook register as your reporting document, you could misinterpret the $2,000.00 in the checkbook as an asset. When in reality, $1,800.00 is due for quarterly taxes, leaving only $200.00 as available income. Making decisions without having all the information available can become disastrous.
Church Accounting Software Support
Most software comes with some form of support — ie email, online ticket submission, or phone. The question is, does that support format work for you in regards to giving you the information you need in a timely manner? We have found that certain types of support don’t work well for accounting questions because of the complexity. For example, email and online ticket submission have the potential to allow users to fall through the cracks and may not answer the questions fully. In other words, some transactions in accounting, require hands-on support. This is where phone support shines because it ensures more complete answers to the end-user in complex scenarios.
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Here’s the rub. Most church management software companies that include accounting, opt to give their end-users the ability to only use email or online ticket submission support. Why offer these support options when they aren’t always the best way to facilitate answering accounting questions? Because for the software company these options are far cheaper to support. Phone support is the most expensive option for the software company.
Complex accounting software support
There are other issues with answering accounting questions using only email or online support forums. While email and support forums are set up with the goal of helping the end-user, it can sometimes do the opposite. When the question is not explored via phone conversation, certain aspects of a scenario may get left out. This can cause information that may lead them down the wrong path.
A very good example of being led down the wrong path is a payroll question. Payroll is the most complex part of accounting. Factors like tax withholding, a pastor’s unique salary requirements, deductions for health care and/or other benefits are perplexing. Most of the questions that arise from these areas require a lot of back and forth questions. The follow-up questions are necessary to keep the church on the right side of the law.
How Do Restricted Funds Play Into Choosing a Church Accounting Software?
Restricted funds allow churches to keep their money separated for individual missions. Most software can handle an unlimited number of funds but more is not always better. A good rule of thumb would be to ask yourself, “Do I need to know how much money was earned, spent, and remains for ______? If the answer is yes, then you need to create an accounting fund. If the answer is “No” you can still budget for this item within the General Fund. By creating unlimited funds, the process for the user becomes more complex.
When to know the church has too many restricted funds
One way to know is if the church is doing a lot of ‘monthly‘ fund transfers from the General fund into the restricted funds. The movement of resources typically indicates the organization is not receiving donations for that particular fund. If you are not tracking money that was “earned” you do not need a designated fund.
Another way is to review the number of funds the church is currently using. Unless the church is considered a very large organization with a budget in the millions, the church probably doesn’t need more than five to ten funds. The fewer funds, the easier the accounting.
What donors want to see is the accountability of the resources. Very few donors take a hardline approach in telling the church how to spend their donations. What they want to know is how much went to X, Y, and Z. Budget line items will answer these questions, making the accounting far less complicated.
Restricted fund poor
Another phenomenon that happens with too many restricted funds is the church being ‘restricted fund poor’. When the majority of the church’s resources are restricted to a point that they don’t have enough resources to operate. For example, the church was given a trust account that is quite large, but they are struggling to pay the month-to-month bills via the General Fund.
Another disadvantage of having too much money in restricted funds is that the financial statements reflect this within the checkbook accounts. It will show the total amount for all restricted and unrestricted accounts in one sum. If the church board is not paying close attention it will look like the checkbook has a lot of money but in reality, it doesn’t. The restricted funds hold the majority of the money, whereas the General fund has only a small percentage of the overall total.
Over complicated accounting setup
For whatever reason people like to overcomplicate everything. Even Confucius had something to say about overcomplicating our life thousands of years ago. To make it worst, he wasn’t even dealing with the technology we have today that complicates our lives.
“Life is really simple, but we insist on making it complicated.”
Confucius (551BC – 479BC)
We could get into all the phycological reasons for this phenomenon but do we really have to? Just look around and see the overcomplicated things in a person’s life. The TV remote has 99 buttons too many. Most people don’t know what the majority of the buttons do. TVs use to have a volume and a channel button, period. Cars are another over complication with all the dials for temperature, A/C, seats, radio, and so on. I can remember a time when all you had was AM/FM, a tape cassette, a heater (no A/C), and the gear shifter.
Needless to say, a church should set up its accounting to be as simple as possible. Sometimes this is referred to as the KISS (Keep It Super Simple) principle. The idea is to not make the accounting system so complicated that it helps users make mistakes instead of avoiding them.
Where does the CPA’s help come into play?
If your church is fortunate enough to have a CPA, that’s great. However, using this valuable resource the right way can be a hurdle. A CPA can help set up the books with ease provided they don’t overcomplicate it. It’s best that church staff stays heavily involved in the creation of the funds and chart of accounts.
The church needs CPAs that educate staff on how to run transactions the correct way and shows them how fund accounting works. When the CPA enters all the transactions the church sets itself up for failure. Why? Because what happens if that CPA has to walk away for any length of time or permanently? The church is left with no training or experience.
What about the other finance team members?
The church typically has a few people on the finance team or the church board may take its place. Whatever the makeup might be, the finance team needs to keep that they all need to have a unified accounting process.
While the CPA can give advice on how to set up the accounting books or even help to do it, the CPA should respect the final decision of the finance team. The one exception to this is if the CPA sees the church going down a road where they could break a law, they should then intervene to assure it doesn’t happen.
Choosing a Church Accounting Summary
As this post shows there is a lot that goes into choosing a church accounting software. The church must understand financial statements and everything that goes into preparing the different types. Understanding why the church can’t just use a checkbook register for their accounting software is important.
Having the right software support for accounting is critical. Churches should stay away from email and ticket support forum only support because of the complexities of accounting. We also discussed the complexity of restricted funds within the church and why the church should try its hardest to minimize the number of restricted funds. Lastly, we discussed the finance team and how people contribute to the success or failure of the church’s accounting systems.
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