Why You Should Do A Financial Analysis

Part of the process of good planning is evaluation and looking at what you’ve done in the past. It’s how we learn to improve and do things better. It’s no different in fundraising and donor giving data is one of the most tracked metrics in a lot of non-profits, particularly larger ones with more robust databases.

But this can be an extremely useful practice in the church as well.

Assessment Tools

There are many assessment tools you can use to collect the data you need. They vary in breadth and depth of information, but the truth is a simple analysis in an excel spreadsheet will suffice to identify the pertinent info and trends needed to understand what is happening in your church with respect to giving and finances.

The criteria I use is quite simple and consists of 5 factors that are specific to giving. There are certainly other more extensive tools that are necessary in a feasibility study or strategic planning process that address a more extensive range of factors, but for the purposes of donor analysis, simple is enough.

The five factors I look at are:

Donor demographics (age and gender)
Total annual giving amount per year
Church tenure
Giving pattern (how many times/year)
How did they give (type of gift and method used to give)

If you do not have the data readily available in your database, or you are unsure how to get it out (no, you’re not alone in that) just obtain the giving data and use some sort of spreadsheet program like Excel or Numbers. You will want to be able to sort and filter the data once you get it.

Donor Demographics

First of all, it is imperative to re-define who our potential donors are. Historically, we defined donors as family units. When we ask church leaders who many donors they have, the answer is almost always related to the number of families that attend. Today, families often have two working parents with separate incomes, and often this can mean separate giving interests.

Adult children living at home also represent a group of “hidden” potential donors. Youth are also another group to consider as donors. In fact, youth and young adults living at home have some of the highest percentage disposable income because they do yet have the same cost of living costs as those in their own homes. Do not overlook your youth when doing your donor analysis for potential donors.

So, the names, ages and gender of your donors in the first 3 columns of your table should list individually anyone who has the potential to give.

Also, to be included in this analysis are those who gave nothing. Sometimes churches carry more non-givers on their church records than givers…and they don’t even realize it! It is important to the analysis to show both.

Age of Donor

You need to enter the ages of all your donors. If you do not have that information, you can use age ranges such as 20-29, 30-39, etc. The age of the donor alone will dictate certain assumptions when it comes to giving.

For the purposes of this analysis, you want to look for “gaps” in giving. This does not mean you are looking for an even distribution of giving. Those aged 45-60 have probably reached their peak earning potential and will likely be some of your largest givers.

Those in their 20’s on the other hand may just be starting out and not have the same amount of earned income to give to the church. But do not assume that means they cannot give anything. Everyone can do something if they want to.

What you want to look for in this column is whether there are individuals in the ages categories that give well below their potential or give nothing at all. Even giving at a low level is encouraging. The donors or members who give nothing are the concern.

If there is a gap in giving it is usually the 25-45 group. Churches have failed badly in preparing younger donors to give. A lot of them do give…maybe just not to the church. With older donors it can be assumed they have a certain level of Christian knowledge and thus will often give if not generously, at least dutifully.

This again is the result of stewardship education being taken off the formal agenda in churches. We are not preparing younger generations to budget and manage money based on the principles of Christianity.

Additionally, many churches have not recognized these age differences and thus, have not offered creative giving choices to encourage younger members to give.

When a “gap” is identified, it becomes an opportunity to address the problem proactively. What can be most discouraging is the discovery of people (sometimes many) in the older generations that are non-givers.

Some would argue it is unrealistic to ask young people to give. So then, the flip-side of that question is, “When do you think it is the right time to ask people to give?

Teenagers can’t be asked to give, some are on allowance or they have part-time jobs (hopefully) and are saving for college (hopefully again).

When they get to college, all their (parent’s more likely) money is needed to pay their tuition and living expenses.

When they graduate and get settled into their careers they might have to pay back student loans, or are saving to buy a car maybe a house, get married…how could they possibly give then? These are the high cost years! Afterall, we all need a new car and a big house right?

Then along come kids…we all know how expensive they can be. It has been estimated by some that the cost of children is in the hundreds of thousands…maybe even a million over their lifetime!! And don’t forget how expensive teenagers can be. How could you possibly be expected to give then?

Finally, the nest is empty and it’s time to save for retirement. Not much left over for the church. And once in retirement, we’re on a fixed income…how could we possibly give then?

The point is, we can always find a reason not to give and if young people are not taught to give when they are young, they will be poor stewards when they get older.

It may be worth noting this is the premise behind why many provinces have implemented mandatory community service hours in high school. It is hoped that these students will continue their volunteering after high school.

Total Annual Giving

This is really the column that drives all others. Once completed you want to sort the data according to this column and list your donors in descending order according to the largest gift.

This is often and interesting revelation for a lot of ministers and church leaders for two reasons. First, they are often surprised who their “top” givers are and more so, to find out they are often one of the top 5!

Secondly, ministers and church leaders are often surprised to see who is not on the list in the top 20%…often citing names of wealthy members who have not yet discovered the joy of giving…at least not to the church.

Within the faith-based sector, the 20/80 factor was far more representative as a commitment distribution and not a wealth distribution. A 20/80 (often 10/90 now) ratio usually indicates that success has not been achieved in terms of a proactive stewardship process.

A healthier distribution is 20/50, where the top 20% are giving 50% of the funds. In all the churches I have worked with, never have I seen 100% of the congregation giving to the church. And that’s ok. There are certainly circumstances and instances where people for whatever reason are not able or going to give. The highest we ever saw was a 93% response rate and this was certainly a unique situation.

However, checking the giving distribution is important on a number of levels. First of all, it speaks to the issue of latent potential. If 80% of your congregation are giving at low levels or not at all, there is tremendous potential to inspire a higher level of giving.

Secondly, if your church has settled into this pattern of giving, your leadership has some work to do in the area of expectations and education on stewardship and discipleship.

Benchmarks of Giving

One of the first stark realizations that most churches make during this process are the number of people in regular attendance that contribute nothing financially to the church.

In many congregations that number is around 15-20%. For some it is higher. The highest we have seen is 50%! The ideal here is 5-10%. If you are higher than that, you probably need to work on that.

The other benchmark’s you want to look for are annual giving amounts at; $100, $250, and $500. Also, not unusual and often surprising is that you will probably be through 50% of your congregation working from zero up before giving exceeds $500 per year. If this is the case in your church, that’s a problem and you need to flag that.

This process is often eye-opening for many church leaders. What you learn from this type of analysis is often the catalyst to a proactive remedy. Your assumptions about giving will probably be challenged here in the reality of who is making sacrificial gifts and how many are doing nothing.

But knowing is better than not knowing and is vital to proactive stewardship planning.

Church Tenure

Church tenure looks at how long people have been attending your church and are they assimilating into the congregation. Generally, churches are quite good at assimilating new members into regular attendance and active involvement, but not so much at giving.

Often churches just assume that when people have been in attendance for a while they will give. This is a poor assumption to make because not everyone will move to giving without some sort of formal process of teaching and leadership modelling.

Patterns of Giving

Donors giving patterns have changed over the years. This is indicative of a change in the work force and how people earn money in today’s society. Whereas giving in the church was always weekly the shift has now moved to monthly giving. You should be regularly promoting an online monthly giving program to encourage this.

What Are Your Financial Trends Telling You?

The second important aspect to checking your church’s financial health is to establish your financial trends. Trends help identify where we are headed in the future and are the basis for proactive planning.

A “trend” is an upwards or downwards shift in a data set over time and can be as little as a 2-3% variance year over year. Now, a 2 or 3% variance in one year is nothing to be too alarmed about if you bounce back the next year. But a 2-3% variance over the course of 3-5 years, could be concerning at the very least, particularly if the trend is headed in the wrong direction.

So, you need to ask the question, “If nothing changes, where is this trend taking us?” Extrapolate the trend forward and create a 5 or a 10-year window. If the trend is heading in the wrong direction, this will be very visible over the long term.

Side note again: The Anglican Church of Canada has stated it is trending to a zero membership by 2041. That’s closer than you think. Where are your trends taking you?

Minor variances, like 2 or 3% can be somewhat deceiving if only looked at on a yearly basis. It’s easy to believe a variance like that can be made up next year and it probably can…if it’s an anomaly. If it’s a negative trend, 2 or 3% over five years can add up to 10-15% cumulatively. A 15% decrease in giving is actuality quite significant and can have some serious consequences on church ministry and programming.

Cash Flow Trend

The easiest trend to identify is projected cash flow, however not necessarily the easiest to remedy. Sometimes a downward trend in cashflow can be hidden in other revenue from user fees, rentals and other income. Churches often find themselves in a situation where donor base income is decreasing while the “other” income is increasing.

Mainline churches have been sourcing “other” income for years now. This revenue of course is welcomed and encouraged but, isn’t really a long-term solution for decreasing donor revenue. And it is unlikely it will fund your ministry or keep your doors open.

Donor Per Capita Trend

The donor per capita trend relates to the cost per donor to fund the church. Simply take the church budget and divide it by the number of donors to establish a donor per capita cost. Do this each year for the past 5 years.

In most growing churches, the number of donors is increasing in relation to cost, so the per-capita amount is fairly stable. When there is a flat or decreasing donor base, and the costs are increasing, churches will have an increasingly higher per capita cost in relation to the donor.

Eventually, what often happens is the gap between the number of donors and the per-capita cost widens and the church’s ministry cannot be sustained. This is very characteristic of churches in the latter stages of the maintenance mode and the slide into decline and eventual demise.

Deferred Needs Trend

Another trend worth noting in the analysis is your deferred needs trend. When churches are sustaining a minor budget shortfall, not only does it not leave room for increased ministry, but it makes finding the resources for maintenance of the building and property difficult too.

Often churches in this instance do a special appeal and sometimes the response is adequate. The issue with this though is again dealing with stewardship and financial issues in a “crisis” situation. Not very inspirational or appealing.

Unless it’s for the pipe organ…then that can be very appealing. I jest of course, but not really. For the most part, a special appeal to fix the roof is not nearly as appealing in comparison and often not as fruitful in the response either.

So, the better strategy here is to plan ahead. Often it is no surprise the roof is going to need repair, or the windows and doors need replacing, or the bricks on the outside of the building are falling down.

I once worked with a smaller congregation in the Bruce Peninsula region of Ontario. Their church was indeed falling down…brick by brick. They too were stuck in a small budget shortfall year over year and felt there was no money for repairs, never mind capital renovation project.

The visionaries of the leadership did a very interesting thing. They started piling up the falling bricks just to the right of the front entrance of the church, which had a grand entrance at the top of a long flight of stairs. Eventually, when you entered the church from the front, you could look to your right and be eye level with the pile of bricks.

The visual of this became something no one could ignore anymore. That’s when we got a call.

These items don’t often come unexpectedly, so its relatively easy to plan ahead. This moves the process away from crisis management and puts leaders in a good light. Good for you, you saw that coming and planned appropriately. Congregations respond well to proactive planning and feel good about getting in front of issues instead of the flip side of appealing in crisis.

Long Term Obligations Trend

The final trend we like to look for is debt servicing and debt load. People often asked, “What is an acceptable debt load for our church?” The truth is there are really two kinds of debt in the church and they need to be dealt with differently. There is accumulated operating shortfall and long-term mortgage debt carries internally or commercially.

Accumulated operating shortfall needs to be addressed immediately and effectively. First of all, it is just good management and budgeting to operate in the black and often simple proactive annual fund programs can usually remedy small budget deficits.

More importantly though, the main reason to deal with operating debt is that psychologically it just reinforces the perception that the church is always “struggling” for money. And that’s bad.

Here’s how it plays out. You’re sitting in your leadership planning meeting, and someone suggests a great new idea for outreach ministry and the response around the room is, “oh that’s sounds wonderful, if only we didn’t have this debt we could do that.” Sound familiar?

Operating deficit/debt need to be dealt with. It is a dream killer and often becomes a psychological barrier to ministry growth. So, I do not recommend carrying any operating debt.

Long term mortgage debt on the other hand, can be incurred for the purposes of capital projects. Often smaller congregations who have limited potential to fully fund first facilities or renovation projects will carry some long-term debt.

It is recommended that maximum debt load should be no more than 3X budget long term, meaning more than 10 years. Depending on the interest rates, this can still mean 20-30% of your budget is going to debt servicing. Anything more than this will affect your ability to grow in your ministry.

Conclusion

So, checking your churches financial health is more than just the difference between revenue and expenses. Find out who your donors are and what levels they are giving at or if they are giving at all.

Check your trends and see where your church will be in 5 or 10 years if you stay on the course you are on now. Knowing what is going on is the key to proactive planning that results in healthy church finances.