Maintaining Adequate Liquidity: It’s More Important Now Than Ever

(Originally published as an article within ECCU’s former e-publication, Ministry Banking Today.)

Now that you’ve laid the foundation to effectively manage your finances (Ensuring Your Ministry’s Financial Integrity), it’s time to start building on it. This month we address the second financial priority for ministries: maintaining adequate liquidity. In today’s economy, with unpredictable giving patterns, this discipline is more important than ever.

History tells us that giving dips an average of 1.3 percent (adjusted for inflation) during recessions. And during the economic slumps of 1973 and 2001, donations failed to keep pace with the growth of inflation for the following three years. So it’s prudent for ministries to anticipate lower donations – leading to tighter cash flow – going into 2009. So, how do you effectively manage liquidity to ensure you can meet expenses?

Do an assessment. Do some research to learn how economic trends play out in your region of the country. Determine how your donors or congregation are being affected. And look at the past: How have your donors responded in previous economic downturns?

Create a cash flow forecast. This is a simple yet critical prediction of anticipated cash inflow (income) and outflow (expenses). Project out at least 12 to 18 months and update your projection periodically, at least quarterly.

Determine your target liquidity balance. Estimate your planned expenses, unplanned expenses and events, and unplanned opportunities. The sum of these numbers will help you calculate a wise target liquidity balance for your ministry. (Make sure to deduct restricted funds from your cash reserve calculation.)

Set aside a replacement reserve fund. Create an inventory of items that will require replacement, like your building’s roof. Then set aside a percentage of the replacement cost for each item based on its estimated remaining life.

Take steps to maintain adequate liquidity. This includes retooling or discontinuing marginal programs (Are they all performing well and aligned with your mission?), realigning resources (Are there new ministry opportunities?), and making your need known to supporters with honesty and transparency (Are there ways to increase income?).

For a more thorough explanation of each step for managing liquidity, read these PDF white papers: Liquidity: How Much Is Enough? and Managing Ministry Funds During Tough Economic Times.

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