Designated Funds: Accounting Made Easy
(Originally published as an article within ECCU’s former e-publication, Ministry Banking Today.)
If accounting wasn’t complicated enough, throw in a curveball like designated funds and it becomes even more complex. A recent online dialogue on this topic in the XPastor.org community caught our attention. Here’s a summary of highlights from this dialogue to take some of the mystery out of your accounting practices.
Q: Peter Livingston, executive pastor of Concord Baptist Church in Jefferson City, Missouri, asked: Why do designated funds appear on a separate balance sheet from general operating funds?
A: Ed Harris, executive director of First Free Church in St. Louis, Missouri, says that under fund accounting principles, non-profits generally have separate funds for each designated activity (i.e., capital fund, maintenance fund, missions fund, etc.). Each fund has its own set of accounts tailored to the type of activity it focuses on and its own balance sheet.
Q: What are the benefits?
A: Harris says one benefit of this approach is that it is easier to review activity in your accounts because you don't have commingling of a lot of different types of activity in your operating statements. Also, at year-end the balance on those designated funds will carry forward into the next year.
Q: We have accounts for each ski trip, youth camp, missions work, and so much more! Is it possible to have too many designated accounts?
A: Mark Simmons of Christ Community Church in Milpitas, California, says that when everybody wants a designated or restricted account for everything, this can lead to several problems:
- Less than optimal budget management. Designated accounts, in particular, are often used as a slush fund when ministry leaders use up their budgets.
- Balances that grow and rarely get used over the years. Ministry leaders begin to think of these funds as “their” money and create a culture where it is almost impossible to re-designate the funds to a different need.
- The accounting principle of using the most restricted funds first becomes thwarted. Instead, the most restricted funds are seen as a security blanket and only used as the last resort.
- It becomes impossible to maintain proper cash reserves. Or, so much cash is unavailable and restricted that ministry is not properly funded. Both put the ministry at risk.
Q: So, how do you minimize the number of designated accounts?
A: From his own experience, Simmons offers these suggestions:
- Educate staff on any areas that are out of step with accounting principles, legal requirements, or good stewardship. In particular, help your staff understand and appreciate the advantages of holding unrestricted reserves versus several smaller separate funds.
- Set up categories within a ministry budget for things like VBS and retreats that require separate tracking, but really are recurring budget items.
- Review each designated and restricted account with the ministry leader and put together an appropriate spending plan for each. (You may find that some of these funds are used to partially fund their budgets.) Include a sunset clause: If funds aren’t used (as pre-approved) by a specific date, then the balance is to be moved to the general fund.
Simmons also says his church reduced their number of bank accounts from 12 to 4, thus eliminating all accounts attached to their special funds. This allowed the church to put together a cash management system that added over $50,000 to ministry last year.
For a more comprehensive analysis of accounting, tax, legal, and ethical issues relating to donor-restricted gifts and the use of designated funds, we suggest reading the book Donor-Restricted Gifts Simplified or the article Proper Care of Donor-Restricted Gifts by Dan Busby, president of Evangelical Council for Financial Accountability.