Nonprofit Resources

A Key Cash Flow and Reserves Ratio for Churches

Days of Operating Cash and Investments on Hand to Fund Annual Cash Expenditures

In a recent post, we explained a key income ratio for churches, annual contributions per average adult attendee, and how churches can use it. Now let’s look at an important cash flow and reserves ratio for churches: days of operating cash and investments on hand to fund annual cash expenditures.

Why Cash Flow and Reserve Ratios are Important

We’ve all heard it before — “cash is king.” Positive net income and net asset balances won’t make up for inadequate cash reserves to fund outflows or help handle months when giving is down. A church without necessary reserves will be scrambling to operate in the short term, no matter what the other balances are.

Cash flow and reserve ratios and measurements represent important indicators every church should understand. One such key ratio for churches is days of operating cash and investments on hand to fund annual cash expenditures. It is calculated as:

Operating Cash and Investments
Total Expenses – Depreciation Expense + Capitalized Interest

This ratio computes the days of operating cash and investments on hand to fund annual cash expenditures, specifically related to very liquid assets. It only considers operating cash and investments, not other current assets and liabilities.

So what should your church consider “operating cash and investments”? These are resources that do not carry donor restrictions on the assets and are available for your church to spend without limitations. For example, if you received donations of cash or investments for a specific cause such as missions or the building fund, they would not be considered operating because they were given for an intended use.

Be careful not to confuse funds that have been restricted by an outside donor with ones that have been designated internally for a specific use. I am talking about amounts that have been internally designated or directed by the church board or governing body. You would consider these operating because your church can redirect them without violating external donor restrictions.  

Operating cash and investments are then divided by annual cash expenditures. This is the sum of expenses minus depreciation, which is the largest non-cash annual expense recorded by churches. Capitalized interest is also added back. This is just interest that is paid in cash and not expensed but capitalized. This may occur during periods of construction when the accounting treatment requires your church to capitalize this cash expense as part of the cost of the asset being built. The goal of this calculation is to take annual cash expenditures and divide them into operating cash and investments to calculate the number of days in reserve.

Benchmark

Some churches want to maintain a certain level of reserves. These reserves can be used for economic downturns or unexpected expenses, events, or new opportunities. Often, churches that try to build up reserves have a goal.

We believe an appropriate benchmark for this ratio is between 40 to 80 days of annual cash expenditures on hand. A result of less than 20 days could be interpreted as a red flag. If your church’s ratio is 20 or fewer days, we recommend an immediate reduction to annual cash expenditures if sources of operating cash and/or investments are not forthcoming in the near future.

In-depth Insight

This is one example of the ratios and measures available in the CapinCrouse Church Financial Health Index. CapinCrouse clients and subscribers can access a range of ratios and measures to assess and track their church’s financial condition, measure against benchmarks, and compare to peer institutions.  Please contact us to learn more. 

Sign up for e-news and alerts