METRICS THAT DRIVE SUSTAINABILITY. Presented by: Salmon Sims Thomas & Associates

HELPING LEADERS BECOME BETTER STEWARDS. METRICS THAT DRIVE SUSTAINABILITY Presented by: Salmon Sims Thomas & Associates

Table of Contents WHAT GETS MEASURED AND MANAGED: EXAMINING THE VALUE OF CHURCH METRICS 3 Over the past 30 years, I ve sat in business meetings with pastors and board members and watched them cringe (literally) when required to review yet another financial report from the business office. Their eyes glaze over, and they begin doodling and drawing pictures on the financial statements. Why can t executive leadership love financial statements like I do? Why can t financial data be intuitive to pastors? Why can t this data be relevant and absorbed at the 30,000-foot level instead of at ground zero? Why can t bookkeepers and financial secretaries read the pastor s mind and give them a top 10 list of data that could be easily measured and managed? Why? That s an excellent question. MEASURING MINISTRY ACTIVITIES 4 Numbers tell the story, always. Whether you re looking backwards (historical perspective or what was ), or whether you can project operations forward, ministry leaders use data to analyze what if. Churches operate from one week to the next, resulting in 52 weekly cycles. Whether your weekend service begins on Friday, Saturday or Sunday, cash comes in (contributions) and cash goes out (ministry expenses). Trends develop over time, and ministry leaders can effectively navigate risks and opportunities by using and understanding Key Performance Indicators (KPIs). UNDERSTANDING METRICS THAT QUANTIFY LEVERAGED ASSETS 5 4 key debt-related key performance indicators (KPIs) that can help you evaluate the cost of financing debt; assets held for property, plant and equipment; and funds invested in public and private financial markets. FOCUS ON: SUSTAINING RESERVES METRICS WHAT THEY ARE, WHAT THEY TELL YOU & RED FLAGS Coming in April 2017 2 CHURCH EXECUTIVE METRICS THAT DRIVE SUSTANABILITY

What gets measured and managed Examining the value of church metrics Dear Pastor: How many times have you sat in your finance committee meeting reviewing monthly budget reports and wishing you could run, hide and never come back? I ve watched each of you squirm. I ve watched you sweat. I ve watched you wish you could dissolve into the seams of the carpet because dissecting, translating and understanding financial data just isn t your cup of tea. If it was, you d be an accountant instead of the senior pastor. Right? Sincerely, CHURCH CPA Over the past 30 years, I ve sat in business meetings with pastors and board members and watched them cringe (literally) when required to review yet another financial report from the business office. Their eyes glaze over, and they begin doodling and drawing pictures on the financial statements. Why can t executive leadership love financial statements like I do? Why can t financial data be intuitive to pastors? Why can t this data be relevant and absorbed at the 30,000-foot level instead of at ground zero? Why can t bookkeepers and financial secretaries read the pastor s mind and give them a top 10 list of data that could be easily measured and managed? resources, whether a church tracks cars in the parking lot, first-time visitors, Sunday school attendance, giving units per location or by service, and / or text-to-give donations. These operational metrics tell where and how a church is growing, and whether or not the church can effectively manage additional growth. It s all in the numbers! What gets measured, should be managed. Why measure if it s not relevant? It s a wasted effort. Plain and simple. The dilemma for leadership is understanding what should be measured. To that end, certain tangible operational risks always keep church leaders awake at night: When do we staff up to handle congregation growth and related pastoral issues? When should we outsource activities that have traditionally been performed by staff? Should we rent space instead of build, or should we expand our current facility? Should our annual budget include long-term maintenance projects? Should we create a foundation or permanent endowment to manage our longterm repair and replacement costs? These challenges are navigated by strategic governance. Key performance indicators (KPIs) measure effective programs and strategic governance. KPIs, or metrics, define standards of efficiency, performance, progress and ministry outcomes. See if the following equations make sense: If numbers + statistical information = ratios, THEN Ratios = Performance Metrics Why? That s an excellent question As accountants, we love financial statements and numbers, row after row after row. But, we re the number-crunchers and you should expect us to love reams of financial reports. The more, the better! We would never conceive of less is more. Church leaders aren t typically accountants. So, what s meaningful to we CPAs is uneventful for them. From a numbers standpoint, each Monday morning the senior pastor really has five questions he or she needs answered: 1) What was attendance this past weekend? 2) How much was the weekend deposit(s)? 3) Is payroll covered? 4) Has the mortgage been paid? 5) Are we on track (translation: on budget)? These five broad questions relate to performance and, ultimately, to church sustainability. Numeric data tells a story that drives church If performance metrics = effective ministry, THEN Effective ministry + STAKEHOLDERS = SUSTAINABILITY Can you see how this information could give senior leadership tools to sustain the growing demands or opportunities of their congregation? These metrics are snapshots that define the operational, financial or spiritual health of a church. If a picture is worth a thousand words, then a thousand pictures create what? A story. A story that defines effective ministry and sustainability. Join us over the next several issues as we explore 10 church metrics that define and drive sustainable ministry for churches. Rebecca DaVee is a partner with Salmon Sims Thomas & Associates. She has been working with churches, ministries, televangelists and other tax-exempt organizations for more than 30 years. For more information, visit www.sstcpa.com. If a picture is worth a thousand words, then a thousand pictures create what? A STORY. A story that defines effective ministry and sustainability. METRICS THAT DRIVE SUSTANABILITY CHURCH EXECUTIVE 3

Measuring ministry activities Numbers tell the story, always. Whether you re looking backwards (historical perspective or what was ), or whether you can project operations forward, ministry leaders use data to analyze what if. Churches operate from one week to the next, resulting in 52 weekly cycles. Whether your weekend service begins on Friday, Saturday or Sunday, cash comes in (contributions) and cash goes out (ministry expenses). Trends develop over time, and ministry leaders can effectively navigate risks and opportunities by using and understanding Key Performance Indicators (KPIs). Common Scenario: Mega church has four locations with multiple services each weekend. Forward-thinking ministry leaders monitor donations: 1) Date week over week 2) Location month over month 3) Activity year over year We have created 6 operating metrics that result in effective: 1) Donor development 2) Fundraising efforts 3) Resource allocation 4) Personnel costs 5) Facility management 6) Short-term cash management KPI #1: Effective Donor Development By using the following formula, churches monitor donations and how certain criteria increase or decrease the average donation: Total Contributions / # of Donors = Average Donation by Donor This computation can be performed annually or by specific events (example: Easter), by date, by location, by service. Imagine how forwardthinking leaders could use the following data: KPI #2: Effective Fundraising Activities To evaluate fundraising activities compare the contributions raised with total fundraising costs using the following formula: Total contributions / Total Fundraising Expenses = Cost of raising $1 of donations The lower the cost of raising funds indicates effective fundraising activities (example: $8 versus $2.50). It is important to accumulate all fundraising costs (direct and indirect). Anytime a church asks for support (written or verbal ask) solicitation occurs. Churches should capitalize and duplicate effective fundraising activities. KPI #3: Effective Resource Allocation Churches raise support for ministry activities and are grouped as follows: 1) Program Services = Church activities (examples: evangelism, worship, education, missions) 2) Member Development = Orientation, training 3) Support Services = General and administrative costs 4) Fundraising Activities = Direct and indirect costs used to raise funds Visualize your annual budget. How much of your resources are used to support church activities versus general and administrative costs? Program Services Evangelism $150,000 Worship 100,000 Education 100,000 Missions and outreach 300,000 650,000 (65%) Member Development 75,000 (7.5%) General and Administrative 200,000 (20%) Fundraising Activities 75,000 (7.5%) Total Budgeted Expenses $1,000,000 (100%) I encourage you to review your budget and see how resources are allocated between program and supporting services (examples: member development, general and administrative and fundraising activities). Should more resources be focused on program services? Should 80% be allocated to program activities versus 60%? Ask your donors. KPI #4: Effective Personnel Analysis How much of your resources are invested in personnel? Your personnel are responsible for fostering your church s tax-exempt activities. Personnel are classified into three groups: paid staff, independent contractors, and volunteers. How much of your budget is invested in personnel? Analyze your costs based on the following formula: Total compensation costs / Total expenses = % of budget invested in personnel Total compensation costs / # of FTEs = average employee compensation KPI #5: Effective Facility Management How much of your budget is invested in your facilities? Total occupancy costs / Total expenses = % of Operations to maintain bricks and mortar What are your occupancy costs by square foot of common space? Total occupancy costs / Total square feet of common (usable) space = Cost per square foot How much of your resources are dedicated to replacing your property, plant and equipment? Replacement costs can be defined as the annual cost of depreciation (multiplied by the annual cost of inflation). Even though depreciation is a non-cash expense, it is the amortized cost of the asset. It s important to use this expense to fund future replacement costs. As part of your year-end closing procedures, consider creating a board-designated replacement reserve as part of the church s unrestricted net assets. KPI #6: Effective Short-Term Cash Management Our last operational metric calculates short-term cash flow requirements. Unrestricted cash / Annual cash disbursements = # of months available to fund operations Best practices indicate that churches should maintain three to six months of unrestricted cash to fund operating expenses. By tracking this metric, year over year, cash management trends are identified and can be effectively managed. This metric allows the church to create a reserve policy for short-term and long-term cash flow requirements. This article is the second in a four-part series that explores 10 Church Metrics that Drive Sustainability. Our third article will explore metrics that define effective use of resources. Rebecca DaVee is a partner with Salmon Sims Thomas & Associates [ www.sstcpa.com ]. She has been working with churches, ministries, televangelists and other tax-exempt organizations for more than 30 years. 4 CHURCH EXECUTIVE METRICS THAT DRIVE SUSTANABILITY

Understanding metrics that quantify leveraged assets In 1856, 16 individuals formed First Presbyterian Church of Dallas. For 15 years, the congregation met in various locations, including the Dallas County Courthouse. 4 key debt-related key performance indicators (KPIs) Our first set of debt-related KPIs helps churches measure the cost of debt to the annual operating budget (cash expenses), and to total equity. How much of your annual budget is consumed by interest and debt payments? What is the average interest rate for your debt, and what is your debt-toequity ratio? Formula: 1) Interest expense divided by total cash expenses = % of total costs paid to finance debt 2) Debt retirement (principal and interest) divided by cash expenses = % of budget dedicated to retiring debt 3) Interest expense divided by total debt = average rate of financing 4) Total debt divided by total net assets (i.e., equity) = % of resources dedicated to financing long-term assets Our second set of KPIs focuses on the cost of maintaining your facility and equipment. These fixed assets represent resources invested in the physical brick and mortar of the church. Our metrics calculate the percentage of PP&E to total assets, utility cost per square foot, repair and maintenance cost per square foot and the prospective replacement reserves for PP&E. Fast forward to 1872 the Dallas Presbyterians had found a new church home, located on Elm and Ervay. With the arrival of the railroads, downtown Dallas grew, as did the Presbyterian Church. The congregation secured land and a loan for $2,500 for a new building located on the corner of Harwood and Main. In 1893, the building was enlarged and remodeled to accommodate a growing congregation. By 1909, church leadership elected to sell the property for $100,000 and relocate to the southwest corner of Wood and Harwood Streets. The land and construction cost of the new facility was $150,000. The building still stands today, and has retained its historical architectural design. It continues to be used by First Presbyterian for ministry and worship. Healthy and sustained growth has certain criteria, represented by ministerial support, in the form of both people and funds. We can look to the pattern developed by First Presbyterian as an example of sustained growth. People gather to worship and serve a community. Over time, attendance and membership increase, providing additional funds for ministry and an expanding footprint. Funds for First Presbyterian were raised and leveraged, land was purchased, and buildings were constructed and eventually sold, with the proceeds going towards investing in a new facility. This is the funding cycle. Leveraging a church s short-term assets (cash / liquid investments) to expand long-term assets (property, plant, equipment or marketable / private investments) should provide facilities and investment earnings for ministry. Servicing debt (principal and interest) uses operating funds, and maintaining land and buildings requires maintenance; these assets depreciate over time. Buying publicly-traded stocks, bonds, mutual funds or other investments can provide earnings that are used for ministry activities. The following three metrics help us evaluate the cost of financing debt; assets held for property, plant and equipment; and funds invested in public and private financial markets. Formula: 1) Total costs of fixed assets used in operations divided by total assets = resources invested in brick and mortar 2) Total utility costs (or total of any other occupancy cost) divided by total square feet of your buildings 3) Annual depreciation expense (amortized cost of the asset) may be used to set aside earnings (net assets) to replace PP&E. (This helps churches create a repair and replacement fund.) The previous KPIs measured the long-term assets that serve in ministry operations. Our last set of KPIs measures ministry resources that generate investment earnings for churches. When churches effectively use excess reserves to generate income, to support its mission then funds are regenerating earnings for the church. The formula below is an example on how to effectively monitor those funds: 1) Total investments divided by total assets = % of assets invested in public/ private markets 2) Investment earnings divided by total investments = % of return from public investment pools The life cycle of a church indicates that as membership / attendance grows, larger or more facilities are needed for activities. Churches that can successfully save and create reserves for future plant expansion have a significant advantage in managing debt retirement. The costs of maintaining your physical assets are also a significant component of your annual budget. The overarching question to leadership remains how much of your accumulated earnings should or can be used to maintain long-term assets? The answer to this question changes over time and circumstances; however, long-term sustainability with long-term goals are key. Rebecca M. DaVee, CPA, is a partner with Salmon Sims Thomas & Associates [ www.sstcpa.com ]. She has been working with churches, ministries, televangelists and other tax-exempt organizations for more than 30 years, helping church leaders create metrics for sustainability. METRICS THAT DRIVE SUSTANABILITY CHURCH EXECUTIVE 5

R 50% 25% 75% $50 100% 100% $25 $75 0% FUND RAISING GOAL 100% 0% BUDGET EXPENSES 0% 100000 $0 AVERAGE DONATION $100 CHURCH / NPO METRICS THAT DRIVE SUSTAINABILITY Cloudkeeping, a division of Salmon Sims Thomas, provides virtual accounting and advisory services to small, medium and large businesses, faith-based and nonprofit organizations. Our team will deliver comprehensive real-time solutions through the cloud for financial management, reporting and compliance. Access anytime and anywhere. Streamlined reporting and compliance. Seamless integration with key systems. Substantial return on investment. Ensure strong financial controls.