How many months of cash should our ministry have in reserve?

Q: How many months of cash should our ministry have in reserve?  Are there different categories of reserves we should consider? 

A: It would be so easy if there were a magic number for the “number of months of reserves.”  Despite what some might say, it is not that simple.  Cash reserves starts with the ministry’s philosophy of the level of reserves are appropriate—opinions vary on this topic.  One thing is clear—since revenue and expenses ebb and flow, nearly every ministry that does not have some reserves will struggle to pay obligations in a timely manner.

After determine the ministry’s cash reserves philosophy, here are a few other key considerations in additions to operating reserves:

  • Unexpended restricted gift balances.  There should be sufficient cash reserves to cover any unexpended balances of restricted gifts.  Otherwise, the ministry is borrowing against these gifts—a highly dubious practice.
  • Capital replacements.  Whether physical facilities or equipment, they all have useful lives.  The more facilities and equipment a ministry has, the more that must be replaced.  You may be able to “extend” the life for the replacement of some assets but eventually, you will face the replacement costs.  There are only about three options for capital replacement funding:  from reserves, from operations, or by incurring debt.
  • Debt service reserves.   If a ministry has debt, maintaining reserves in conformity with mortgage reserve requirements is a must; if there are no reserve requirements, maintaining reserves  to cover several months of mortgage payment is generally wise..

Cash reserves axiom:  Cash reserves are usually built in good financially times and rarely developed when times are tough. Ministries in a growth mode should take advantage of the opportunity to build appropriate cash reserves


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

Navigation


Follow @ecfa