Archive for May, 2007

Charting Your Ministry

Written by Nick B. Nicholaou on . Posted in Articles

© 2007 by Nick B. Nicholaou, all rights reserved
President, Ministry Business Services, Inc.
Reprinted from The NACBA Ledger

While helping churches refine their general ledger chart of accounts, there are two issues that need to be wrestled through nearly every time:

  • The level of detail in their chart, and
  • Cash or accrual accounting— which would be best for them?

Detailed Chart of Accounts

During this process we encourage clients to re-think each account asking the following two questions:

  • Do we need the account to satisfy a legal or accountability issue?  Accounts we might include for this reason are:
  • Petty cash accounts,
  • Restricted fund accounts, and
  • Any accounts our governing board mandates.
  • Do we need the account for budgetary control purposes?
  • Accounts we might include for this reason are income and expense accounts whose budgets will affect the decisions we make throughout the year.  These are the accounts on the Income Statement (in the not-for-profit accounting world, this report is called Statement of Activities).
  • Accounts we might exclude are those that do little more than compartmentalize income or expense items that aren’t paid much attention to.  An example would be an income account for the few dollars received each year through the offering plate located next to the “free” devotionals at the entry to the church.

In either case, be sure to provide the right amount of detailed budget accounts to help your team manage the budget without overwhelming them with unnecessary minutia.

Understanding Cash vs Accrual Accounting

If you check with your CPA, he or she will likely tell you that your books need to kept according to GAAP (Generally Accepted Accounting Principals), and that means accrual accounting.  Simply put, accrual accounting means recording income and expense transactions in the period in which the income was earned or the expense was incurred.

Accrual accounting works like this:

  • When you receive an invoice in January that won’t get paid until February, the expense would be recorded in January along with a corresponding liability, such as Accounts Payable, on the Balance Sheet (in the not-for-profit accounting world, this report is called Statement of Financial Position).
  • When the invoice is paid in February, the two accounting entries would be on the Balance Sheet alone, reducing both Cash in Checking and Accounts Payable.

In cash accounting, nothing would be recorded for this entry until the invoice is paid in February.  At that time the expense would be recorded with a corresponding entry that reduces Cash in Checking.

Accrual accounting also requires that capital purchases be recorded directly to the Assets section of the Balance Sheet and then be depreciated on the Income Statement over their anticipated “useful life”.

If your ministry has a CPA perform an audit or review, the CPA will want to present financial statements reflecting accrual accounting.  Accrual is required by GAAP, and GAAP is what CPAs are required to comply with.  If you want a clean audit (referred to as unqualified because the financial statements can be relied upon without any qualifying remarks), accrual is your only option.

Modified Cash Accounting

Unfortunately, many of the volunteers who sit on governing boards and who work in ministry are often confused by accrual financial statements.  The two most common mistakes made are:

  • They sometimes look at the amount of cash on hand and make management decisions based on that without understanding the impact of the outstanding obligations whose expenses have already been recorded.
  • They sometimes look at large purchases whose transactions went straight to the Balance Sheet and misapply the budget.

Many ministries prefer to use a modified type of cash accounting.  They operate on a cash basis throughout the year to help their management teams in their decision-making processes, and then make “period 13” adjustments that move capital purchases to the Balance Sheet (period 13 refers to the period outside of their budget cycle).  Those who get audits or reviews will have their CPA do the necessary work to present their reports in accrual basis to satisfy GAAP, keeping the “outside world” happy.  Helpful Hint:  If you operate using a modified cash method, you might save money by asking your CPA to teach you how to provide them with your accounting in accrual form for the audit or review process.

Challenging your chart of accounts with these questions in mind can help simplify your accounting process, freeing resources to do more of that which truly counts while empowering decision makers to build the Kingdom.

What’s Different about Business Continuity?

Written by Nick B. Nicholaou on . Posted in Articles

© 2007 by Nick B. Nicholaou, all rights reserved
President, Ministry Business Services, Inc.
Reprinted from Christian Computing Magazine

Many of us in IT focus on the quality of our system backup— or, at least we intend to.  System backups are essential, but are they enough?  What if the process of recovering from a disaster will be lengthy?  Like with Katrina?  Or 9/11?

That’s when we’ll need more than a disaster recovery strategy.  We’ll need a business continuity strategy.

First Baptist Church in Gulfport, MS – Associated Baptist Press Photo by Greg Warner, used with permission

Rarely Needed
Some never think about this need, and many who do aren’t willing to underwrite the cost.  And though the cost can be minimal, we in church and ministry management strive to focus as much of our budget on program as possible.

Thinking about the kinds of disasters that require a business continuity strategy, we usually figure that the odds of one affecting us are slim.  The problem, though, is that those kinds of disasters are often when our communities need us the most!  Increasing the likelihood that we’ll be able to minister in those troublesome times can make a huge difference in the lives of many.

Disaster Recovery Strategy
Good backups are a way to be certain we can recover from a disaster. This is an IT strategy essential.  We should be backing up our data often and testing our backups to be sure they’ll work when we need them.  Here’s what our firm recommends:

  • Backup your entire system every night.  If your backup device doesn’t have enough capacity to do that:
  • Backup your data and system files every night.
  • Backup your program files whenever they change, or at least monthly.
  • Test your backups every night by configuring your system to do a full verification of what it just backed up by comparing it to the source files.  Review the verification logs daily to make sure all is well.
  • Test your backup monthly by restoring a folder branch.  This will:
  • Make certain the backups are working properly (there’s almost nothing worse than finding out they haven’t been working properly when you are in disaster recovery mode), and
  • Keep you familiar with the process of restoring files.

This will help protect your team if disaster strikes.

Business Continuity Strategy
Simply put, a business continuity strategy helps ensure that we’ll be able to continue doing what we’re supposed to while we’re recovering from a disaster.  Our firm recommends:

  • Take a tape (or other media if you’re not using tape) off-site every week, preferably the one following the day when your team usually does the most database and accounting updating.  For churches, we recommend taking the Monday night backup tape.  Each week bring in the last tape taken off-site and exchange it with the current week’s tape.  This is probably the simplest and least expensive business continuity strategy you can employ.  In a worst case scenario, you will have to wait for new hardware to restore the backup, which might take two or three weeks.
  • A larger strategy includes copying your data to another location so it can be accessed securely over the Internet.  That location should be in a different part of the country.  This should be done for your database and accounting system, and might also include other critical data files.  The key for this step is that the location your database and accounting system is copied to should be able to run them for you in a hosted mode until you’re able to restore that functionality in-house.  Anything less is disaster recover, not business continuity.

When Katrina hit (that’s what this article’s picture is from), church members and staffs evacuated in all directions. Very few had a plan that would allow their staffs to access their database and accounting systems while they were dispersed throughout the country. Yet those members who were able still wanted to contribute, vendors still needed to be paid, and staff still needed paychecks.

How About You?
Do you have a business continuity strategy?  While we pray that you’ll never need one, the reality is that you might.  And being a good steward may require that you had one in place when disaster hit.