When you consider factors that contribute to your church’s success, financial transparency may not be at the top of your list. However, research shows that being open and honest about spending is strongly correlated with increased giving to churches, which in turn provides the resources you need to serve your community.
Financial statements are among the best tools your church has at its disposal for promoting external transparency. These core accounting documents summarize financial data so it’s easy to understand, analyze, and act on, which also makes them useful for internal decision-making.
In this guide, we’ll review the basics of creating financial statements for your church so these reports are as useful to you as possible, both externally and internally. Let’s dive in!
Understand the Types of Financial Statements for Exempt Organizations
Your church’s financial statements will be similar to the ones other tax-exempt organizations (nonprofits, healthcare organizations, educational institutions, etc.) create, since your primary accounting goal is the same: promoting accountability to supporters. Here is a quick breakdown of the four core financial statements your church will create and their internal applications:
- Statement of activities: This report is the nonprofit equivalent of a for-profit income statement. It outlines your church’s revenue totals and sources (donations, grants, earned income, etc.), expenses, and change in net assets over a given fiscal year. The line items on this statement should correspond to your church’s budget so you can use it to make accurate financial projections as you plan for the coming year.
- Statement of financial position: Also known as a balance sheet, this statement provides an overview of your church’s financial health. It does so by detailing your assets (what your church owns, such as cash and property), liabilities (what it owes, like debt or deferred revenue), and net assets (what it’s worth). With this information, you can determine whether your church is financially stable and ready for growth.
- Statement of cash flows: This statement tracks how cash moves in and out of your church through operating (i.e., day-to-day spending and fundraising), investing, and financing (i.e., long-term capital gains) activities. Compile cash flow reports monthly rather than annually so your church can use them to keep its expenditures and revenue generation on track with its budget throughout the year.
- Statement of functional expenses: This nonprofit-specific report organizes your church’s expenses into the functional categories of program, administrative, and fundraising costs. Most nonprofits use this information to complete their annual tax returns, which your church may or may not have to file depending on how it’s registered with the IRS. Even if you don’t file Form 990, it’s still helpful to create functional expense reports to understand how your church’s spending furthers its mission.
It’s a best practice to keep a few years’ worth of these financial statements on hand at any given time. That way, you can monitor your church’s progress, improve your financial processes, and communicate changes over time to your community for additional transparency.
Keep Detailed Financial Records
All of your church’s financial statements will be based on bookkeeping data, so it’s important to optimize your financial recordkeeping processes to ensure you can create accurate, useful reports. Jitasa’s church bookkeeping guide provides the following tips to help you get started:
- Recognize revenue properly. Some of your church’s larger donations and grants might come with restrictions on their use. Make sure to note those so you can spend the funding on the right initiatives and separate out restricted funds in financial statements.
- Record non-cash contributions. If you accept in-kind donations of goods and services or alternative giving methods like stock and cryptocurrency donations, determine and track each gift’s fair market value for comprehensive reporting and decision-making.
- Categorize expenses consistently. Use functional expense categories across the board if you create that statement and especially if your church files Form 990. If you record costs according to the nature of payments made, use the same organizational system in your budget and statement of activities.
- Invest in dedicated software. Although spreadsheets work for bookkeeping at smaller, newer churches, you’ll eventually outgrow them and need to switch to software. Choose a robust accounting platform that’s nonprofit-specific or that can easily be configured for tax-exempt organizations for best results.
- Designate a church bookkeeper. Your recordkeeping will be more efficient if one person takes the lead on bookkeeping. The largest churches may hire a full-time employee for this role, the smallest churches often give bookkeeping duties to an existing staff member or volunteer, and churches anywhere in between tend to benefit from outsourced bookkeeping services.
While some financial knowledge and on-the-job training is helpful for bookkeepers, they usually don’t have specialized education or certifications because they handle everyday financial tasks (besides data entry, they often write checks, make bank deposits, and process payroll). For higher-level duties like financial statement creation and analysis, your church will also need a certified accountant on its team, whether hired or outsourced. However, bookkeeping is still essential because it lays the foundation for effective reporting when done well.
Publicize Your Completed Financial Statements
Your church can only maximize the benefits of its financial statements if you leverage them for internal decision-making and external transparency. We’ve touched on some of the most important internal applications of these reports (budgeting, tax compliance, strategic planning, etc.), so here are a few ways to leverage them externally:
- Publish financial statements on your church’s website. That way, they’re easily accessible to any congregant or stakeholder that may want to learn more about your church’s financial situation. This approach is especially useful if your church doesn’t complete Form 990, since Form 990s are required to be publicly available for at least three years after filing. (If your church does file Form 990, you could link to your most recent returns on your website for easy access.)
- Incorporate financial data into your church’s annual report. Annual reports tend to have broad audiences that encompass varying levels of financial knowledge and interest. To accommodate this diversity, DonorSearch recommends that your church “include graphical representations of key financial information in the body of your annual report, then attach detailed financial statements as appendices.”
- Reference your statements throughout the grant lifecycle. If your church applies for grants, the funders might ask you to submit financial statements along with your proposal to demonstrate that you’ll use the grant responsibly if you win it. Plus, while you should track grant progress (both financial and programmatic) in a dedicated management system, comparing that data to your financial statements before sending off reports to funders can help ensure grant compliance.
In addition to grantmakers, potential large-dollar donors to your church might be interested in the information in your financial statements, so it’s helpful to have them on hand during conversations with these prospects.
Church financial statements serve many internal and external purposes, meaning it’s important to create them carefully each year. Use the tips in this guide to get started, and remember that it’s often useful to partner with an accountant who specializes in working with exempt organizations to ensure accuracy and maximize your statements’ benefits to your church.
