In this last post related to 4 Things to Include in a Master Finance Document, we address the area of Compliance.
In the last section of the Master Finance Document, you’re communicating to the church you’re going to:
a. Document finance policies,
b. Decide what accounting method to use and
c. Declare the church will conduct itself in accordance with the laws of the land.
Documentation of Financial Policies
I can tell you if the church has no written finance guidelines, it’s a formula for chaos. Plain and simple. The church is vulnerable. On the other hand, a church with solid policies safeguards the church, its Leadership, its Senior Pastor, and its Staff – thus helping to keep the church’s testimony in tact. So, it’s important.
Policies are simply high level guidelines. These should be developed with the Senior Pastor and Leadership’s involvement. Once policies are completed, then process flows and desktop procedures can be written. Process Flows are an overview or outline of the steps needed to achieve the guideline. Desktop Procedures are the details at the operational level to accomplish each step.
Outside of the benefits of organizational efficiency and accountability these bring, being transparent to your church is impossible if church leadership isn’t clear on what they are. [I wrote about what financial transparency is here.]
If you don’t have policy guidelines, processes and procedures written, then start with:
*How offerings are to be handled/protected, counted, deposited and recorded
*How things are to be purchased
*How things are to be paid for
*How people are paid
Then move on to others such as :
*Budgeting Process
*Cash Mgmt
*Designated Funds
*Financial Reporting
*Year-end Processes
*Finance Team & Internal Audit Team Function
And so on…
Accounting Basis
Leadership must also determine the accounting basis the church will adhere to – cash, accrual or a hybrid. Secondly whether the church will adhere to Generally Accepted Accounting Principles (GAAP). The bigger the church, the more it should use accrual, GAAP based accounting.
Two things:
GAAP based statements are best for making informed decisions.
A CPA cannot render an opinion if the statements are not in compliance with GAAP.
Adherence to Laws:
The church should always be above board and beyond reproach in everything, including finance.
Here are a few things to be aware of:
1. Mis-appropriation of designated funds. By this I mean intermingling of designated and undesignated offerings. Using offerings given for a specific need/cause on another unrelated need/cause. This is against the law.
Speaking of Designated Funds:
Trust me, the sooner you address this the better. Establish early on the funding of your church and ministries, how new funds are created (if any) and so on. If you have no plan, then you’ll probably have more designations than you desire/need. Thom Rainer found this was a Top 10 Frustration of Pastors in this post.
2. Not staying on top of deductibility rules and guidelines. Many times this leads to donor tax deductions being denied.
3. Not complying with IRS rules in regards to payroll. The IRS does not play. It’s an area that can trigger letters from the IRS (means more work) and cost the church in penalties. Repeated and/or Unresolved issues can trigger an audit and even a visit from a Federal Agent. A lot of churches just outsource payroll altogether. Check out Ovation Payroll and Mag Bookkeeping.
4. Not issuing 1099-Misc forms to sole proprietors who performed a service for your church.
5. Related to #4 – Failing to obtain a W-9 from vendors.
The list can go on forever. The key is to be informed on legal requirements for every finance policy area in your church.
I hope you have found this series of posts helpful in regards to implementing a Master Finance Document.
Following are the posts on this topic:
4 Things to Include in your Master Finance Document
Considerations on Creating a Master Finance Document, Part 1
4 Thoughts on Reporting to your Church
How to Answer Finance Questions from Church Members