“I don’t know if we can pay the staff this week. We may have to delay payroll until after Sunday.”

 Rick was the lead pastor at Westview Community Church. The words from Lisa, the church’s financial administrator, came as a shock. He could not believe what he was hearing. Delay paying the staff? 

“What are you talking about? How are we not able to pay the staff?” Rick replied, somewhat frustrated and completely concerned. 

“I’ve been telling you there were some financial red flags,” calmly replied Lisa. “Things have not improved. There’s not much we can do now. We don’t have the money to cover payroll.”

Rick sat down and placed his head in his hands. He needed to tell the staff as soon as possible and figure out how to correct the issue. 

For a church, financial turmoil usually does not occur over a week or month. Sometimes, financial red flags can present themselves years prior to a financial disaster. If detected early, adjustments can be made, and catastrophe can be avoided. 

What are these red flags, and how can you spot them? Here are eight financial red flags: 

1. The emergency fund balance is gradually decreasing.  

An air conditioning unit goes out. The roof begins to leak. Churches need three to six months’ worth of operating expenses set aside for a financial emergency. Unless an unforeseen financial event occurs, the emergency fund balance should remain stagnant. Any money used from the fund should be quickly replenished. Identify the amount needed in the church’s emergency fund, and evaluate whether the level has been maintained over the past year or two. A gradually decreasing emergency fund can occur when a church lacks the financial margin required to replenish the fund. This is a financial red flag. 

2. Bill payments are late.

From a community witness standpoint, the way a church pays their bills is neutral at best, detrimental at worst. A church will not receive any accolades for paying bills on time. However, if a church consistently pays their bills late, it could negatively impact their perception in the community. Consistent late payments can indicate poor cash flow and budget management. This issue will not correct itself and is a financial red flag.

3. Funds are unavailable for facility maintenance.

“We can push off getting a new air conditioning unit.”

“We can get a few more years out of the roof.”

“I’m sure no one cares that much about the permanent stains on the carpet.”

Unfortunately, church buildings do not improve with age, and many church facilities have significant deferred maintenance. Often, this is due to the lack of a sinking fund for known, future facility repairs and improvement. Instead of allocating a portion of offerings for future maintenance, the funds are used for other purposes. And while the direction of those funds toward alternative purposes may have honorable motivations, the church is left without money for large, common expenses. When finally forced to remedy a facility issue, the church can find itself in a very difficult spot. Unavailable funds for facility maintenance is a financial red flag. 

4. Church debt is too high.

Churches must be very wise when considering debt. Regarding church debt limits, the rule of thumb is to avoid exceeding debt that is two times the annual budget, and monthly debt payments should not consume more than twenty-five percent of the monthly budget. If either is higher than these rules of thumb, a church can find itself in a very financially fragile position. Churches with significant debt struggle to weather negative movements in generosity. A high debt balance is a financial red flag. 

5. Personnel budget is too high.

Churches should take care of their staff. However, churches should avoid allowing personnel expenses to consume too much of the budget. The rule of thumb for personnel expenses is to remain at or below fifty percent of the operating budget. While some situations and contexts warrant a higher percentage, churches are wise to hover around that fifty percent mark. High personnel costs can lead to ministry and facility maintenance funding challenges. Negative changes in giving can also result in staff layoffs. Therefore, a high personnel budget is a financial red flag. 

6. Personnel budget is too low.

While a high personnel budget can be a financial red flag, churches should also be wary of extremely low personnel budgets. Extremely low personnel budgets are sometimes celebrated as good stewardship, but the low funding may have unintended consequences. Personnel budgets that dip below the thirty-five percent mark can indicate an underpaid church staff or the need to hire more staff. When left unaddressed, churches with extremely low church staff budgets tend to see regular staff burnout. Therefore, a low personnel budget is a financial red flag.

7. Downward trend in giving units.

What is the three-year trend of your giving units? Are there any significant shifts in giving unit numbers when comparing this year to last year? Giving units are groups of family members. As an example, a husband and wife are considered one giving unit, even if they give separately. The giving unit statistic isn’t necessarily concerned with the amount members give but how many members give. Church leaders should pay attention to a decline in giving units. A decline may indicate a deeper heart, trust, or discipleship issue among members. Financially, a decline in giving units is often indicative of a future overall decline in generosity. Therefore, a downward trend in giving units is a financial red flag.

8. Downward trend in per capita giving.

You’ve looked at your giving unit trend. What about per capita giving trends? How does the three-year trend look? What about when you compare year-over-year per capita giving? Per capita giving measures the amount given per person in the church. It is the church’s annual giving, divided by average total weekly attendance, divided by fifty-two weeks. For many churches, per capita giving looks strong, primarily due to non-giving members leaving during the pandemic. However, church leaders should continue to keep close watch of this number. A small shift now can indicate a future decline in generosity. Therefore, a downward trend in per capita giving is a financial red flag.

Church leaders should look for these financial red flags. They are indicators of potential future financial challenges. When identified early, adjustments can be made.  Fixing these cracks in the church’s financial foundation can prevent a future financial catastrophe.

If you’re not quite sure where to start, read our recent blog, 9 Ways to Help Your Church’s Financial Health this Summer. This outlines some practical ways to evaluate your financial health, some steps you can take to lower overhead, and how to plan now so you can see giving increase in the future.