STEP BY STEP FINANCING
You have developed a five-year strategic plan to build a new
auditorium, add classroom space and enlarge the kitchen and office spaces. Your architect
has prepared the site plans and the congregation is committed to break ground in six
months. Finally, your lender has asked for "Reviewed" of "Audited"
financial statements for each of the past three years. No problem! You go to the church
bookkeeper and ask for copies of the monthly financial information that was supplied to
the governing board or financial committee.
Unfortunately, the lender declines to provide financing stating
that an "independent" CPA did not prepare the financial statements. Further, the
financial statements were neither prepared in accordance with GAAP (Generally Accepted
Accounting Principles) nor do they properly reflect Not-for-Profit accounting
requirements. The end result is delayed construction with escalating building costs and
frustrated congregation members.
How can this be prevented?
STEP ONE – PLAN EARLY
Lenders are looking for one thing, your ability to repay your
loan. They want to see a proven "track record" including a demonstrated growth
in member contributions and control of operating and overhead expenses. The way to convey
this information is through your financial statements. You will be required to supply
Reviewed or Audited financial statements for a two or three year period prior to the date
of your loan request. Remember that many borrowers are applying for a limited number of
loan dollars. Your financial statements will give your lender a tool to compare your
financial strength with that of other applicants.
Because lenders place so much reliance on your financial
statements, they will ask that they be prepared by a Certified Public Accountant. A CPA is
independent and does not have a financial interest in the church or the results of the
financial statements. Also, a CPA will prepare the financial statements in accordance with
GAAP and will follow other professional guidelines as directed by the American Institute
of CPA’s.
AICPA standards for not-for-profit financial statements are
unique. These statements must include a Statement of Financial Position, Statement of
Activities, Statement of Cash Flows and footnotes. Donations must be separated into three
classifications (unrestricted, temporarily restricted and permanently restricted).
Likewise, expenses and year-end net assets must be categorized using these three
classifications.
Very few churches have internally generated financial statements
that meet either AICPA or lender requirements. Accordingly, the early selection of a CPA
should be part of the long range planning process.
STEP TWO – BUILD THE INFRA STRUCTURE
Before a church can meet the financial reporting requirements
outlined in step one, two elements must be in place. First, a good quality general ledger
system must be used. Second, well trained bookkeeping personnel must be responsible for
all accounting transactions in the general ledger.
Too frequently, accounting software is not suited for the
financial reporting requirements. With the help of your CPA, select a double entry general
ledger system that meets your needs today and is capable of growing with your needs in the
future. Software can range in price from $600 to over $5,000 depending on the
sophistication of the application. Upper end software usually includes the ability to
track individual member contributions and builds a membership database. Software that is
available for home or small business use (Quicken, Quick Books, MYOB, etc.) is not
designed for not-for-profit accounting. These are not true double entry general ledger
systems and do not have the flexibility needed for your financial reporting and budgeting.
Your CPA can assist you in selecting a software package suitable for your needs.
The second element of an effective infrastructure is qualified
personnel. Too frequently, an individual in the church office, or a volunteer, has filled
the role of bookkeeper. In simple truth, the bookkeeping function has probably outgrown
both the skills and the available time resources of the existing staff.
With the aid of your CPA, hire a skilled "full charge"
bookkeeper/accountant. The complexities associated with the accounting activities of a
growing congregation can not be underestimated.
IN SUMMARY
Plan for your financial reporting requirements and incorporate
this process into the early stages of your plan for strategic growth. Begin the process of
selecting your bookkeeping staff, developing your accounting systems and preparing your
financial statements several years before you are ready to ask a lender for significant
financing.
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