MAKE
YOUR CHURCH BANKABLE
As part of your strategic planning process, it is important to
begin making your church "bankable". I recommend that you begin your financial
planning at least two years before you are ready to apply for construction or mortgage
financing. Good stewardship requires good financial information. Good financial
information requires commitment!
This article outlines some of the financial information commonly
required by mortgage lenders. Mr. Bob Schepman of the Evangelical Christian Credit Union
has supplied portions of this information.
GENERAL FINANCIAL REQUIREMENTS
* Financial statements, prepared in accordance with generally
accepted accounting principles (GAAP) by a CPA, for each of the prior two to five years.
* Current year financial statements, prepared by a CPA, that are
no older than six months from the date of closing the loan.
* Budget to actual comparisons for two prior years and future
projections including scheduled debt repayment.
* Current real estate appraisal and possible Level I environmental
report.
FINANCIAL STATEMENTS
The Financial Accounting Standards Board (FASB) of the American
Institute of Certified Public Accountants, has established guidelines for what constitutes
GAAP basis financial statements for Christian ministries and not-for-profit organizations.
These principles, contained in part in FASB Statement 116 and 117, govern what is included
in financial statements as well as the procedures for their preparation.
Most lenders will require GAAP basis financial statements prepared
by a CPA. These financial statements will either be Reviewed or Audited
depending upon the size of the loan request. Financial statements include the Statement of
Financial Position (Balance Sheet), Statement of Activities (Income Statement) and
Statement of Cash Flows. Financial statements also include footnotes describing the
activities of the church, its accounting policies, description of fixed assets,
depreciation policy, debt repayment schedules, pledge balances and employee benefit
programs.
The Statement of Financial Position is a
snap shot taken at a point in time that shows your assets, liabilities and equity. Assets
are shown at their actual cost, not their appraised or replacement value. Liabilities are
shown at the amount remaining as of the balance sheet date.
The Statement of Activities recaps your
revenue and expenses during a particular period. FASB 117 requires revenue and expenses to
be separately categorized as permanently restricted, temporarily restricted or
unrestricted.
The Statement of Cash Flows details how
you have used your cash to pay for current operations, debt retirement and acquisition of
fixed assets.
THE ANALYSIS
The lender will compute ratios to determine the capacity for debt
repayment, liquidity and general financial health of the organization. The lender will
also look at trends. A "rule of thumb" is that most borrowers can afford a loan
that is up to three times their annual unrestricted income. For most lenders, unrestricted
revenue will be income that has already been established during the most recent year.
Debt service: Total debt payments should be no greater than
30% of unrestricted income.
Personnel cost: Wages, salaries, payroll taxes, health and
retirement benefits and housing allowances should be no greater than 40% of unrestricted
income.
Collateral: Typical mortgage loans are at a 60% loan to
value ratio.
CONCLUSION
There are three reasons why most churches are unprepared to meet
the financial requirements of the lending process:
1. Historical financial statements are usually non-existent or
prepared without following generally accepted accounting principles.
2. Accounting systems are often inadequate to track information
and accurately prepare financial statements. Quicken and Quick Books are two of the most
frequently used software packages. Both are inadequate for a growing church!
3. Church personnel, assigned to assist with the accounting
function, are generally inexperienced. Most are volunteers or staff members who have been
"drafted" into an accounting role.
All of these deficiencies may be overcome with early planning.
Start by consulting with your CPA. Install quality accounting software and develop GAAP
based financial statements. Provide training for accounting personnel and develop sound
internal controls. Remember, you want to make it easy for the lender to approve your
loan!
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