Building Reserves: What’s Your Target Number?
(Originally published as an article within ECCU’s former e-publication, Ministry Banking Today.)
As ministries adjust to this changing economy, many are wondering how to tweak their budgets to build a reserve. One executive pastor in Ashburn, Virginia, is certainly not alone when he asks “We have varying opinions on the percentage of our budget that should be set aside for reserves—from 1 to 10 percent! Are there any true benchmarks we can use to determine this figure?”
Just as each ministry’s God-given mission is unique, adequate liquidity is unique to each ministry. There are, however, some general guidelines. Two key questions to ask are: How close are your donors to your ministry, and how quickly will they respond if an unexpected need or opportunity arises?
For churches, faithful congregants are usually faithful givers. They attend regularly, participate in current ministries and programs, and keep their fingers on the pulse of the church. Because of their awareness, they tend to respond quickly to needs or opportunities. However, this can be detrimental if those faithful congregants leave your ministry—or face a financial hardship themselves.
A recent survey conducted by Christianity Today International's Your Church magazine revealed that 40 percent of churches are experiencing a decrease in weekly giving by 2 percent or more due to current economic conditions. A good rule of thumb is for churches to have a cash reserve of 60 to 90 days of expenses.
Parachurch ministries experience their own challenges. Because donors tend to be more distant, they are often not as aware of needs, and it can be a lengthy process to inform them. This potential lag time requires that parachurch ministries have a larger cash reserve to cover a minimum of 90 days of expenses.
Think of your reserves in terms of days, rather than dollars. Instead of stating that there is, for example, $750,000 in reserve, which can seem like a great deal of money, it’s better to communicate, “We have 90 days of expenses in reserve.” This communication helps donors understand that, without their continued giving, expenses would not be paid after 90 days.
So how does your ministry determine how much you need to cover 60 to 90 days of expenses? Consider this simple equation:
Transaction Requirements + Precautionary Requirements + Speculative Requirements = Target Liquidity Balance.
Transaction requirements ensure that you have enough liquidity to pay for planned expenses, such as payroll. Start by looking at your cash flow forecast (or budget, if you don’t have a cash flow forecast), which should identify expected expenses during a specific period of time. Then determine how much should be set aside, since the timing of your income rarely matches your expenses.
Precautionary requirements ensure that your liquidity will meet unplanned events and expenses. Anticipate events that might impact income or expenses, and then quantify appropriate reserves if such events were to occur (i.e., a key donor cuts back or stops giving to your ministry, or the roof needs to be replaced). While unplanned events might differ from one ministry to another, some are common to all ministries.
Speculative requirements ensure that you have enough liquidity to pursue unplanned opportunities. This is the place for dreams, or things that God might direct your ministry towards—like new programs, new ministries, or new staff members.
To learn more about how to accurately build your reserves, read the ECCU white paper Liquidity: How Much Is Enough?