Teaching Notes - Sabbath School and Personal Ministries



INTERNATIONAL INSTITUTE OF

CHRISTIAN DISCIPLESHIP

Equipping members for Global Mission

and Outreach

General Conference Sabbath School and Personal Ministries

Community Services & Urban Ministry Certification Program

Module Syllabus & Teaching Notes

CS 05b Technical Aspects of Community Services Ministry:

Finances & Accountability

1 contact hour

Developed by Dowell Chow

Vice President for Finance, Adventist World Radio

©2011 General Conference of Seventh-day Adventists®

Module Description & Requirements

CS 05 Technical Aspects of Community Services Ministry: Finances & Accountability

Description

Although non-profits do not exist to make earnings for shareholders, they are designed to provide programs and services in the interest of the public. This module provides general guidelines and orientation to those who lead out in these organizations on how to conduct a fiscally sound operation and be accountable to their own constituencies.

Objectives

1. The students will make their own basic philosophy of church-based community service organizations from a biblical perspective and from other valuable counsel on the topic.

• To view community services as a core component of the gospel commission.

2. The students will understand the how question for their organization for the next fifty years—the vision.

• To live the vision as a dynamic lifestyle of genuine servanthood.

3. The students will forge a clear picture of the mission of the organization as a church-based service entity designed to minister to people through Adventist churches in communities around the world.

• To understand the challenges as well as the responsibility of keeping the faith while responding to the pains of a global community.

4. The students will know and carry out basic principles of how to fund the mission of the organization, starting with the budgeting process.

• To view a budget not as an end to a process but rather a valuable and dynamic tool in managing the ongoing operations of the organization.

5. The students will know basic fund accounting principles.

• Review the purpose, use, and benefits of fund accounting.

6. The students will understand the various types of financial ratios.

• To visualize financial ratios not as absolute indicators but rather as assessment tools to steer the organization towards financial stability.

7. The students will apply the lessons learned to their own community services organizations.

Requirements

1. Attend the entire workshop.

2. Complete the exercise/questionnaire at the end of the workshop.

3. Complete the evaluation form for the workshop.

Suggested reading material

Dropkin, Murray, Jim Halpin and Bill LaTouche. The Budget-Building Book Nonprofits.

San Francisco, CA: Wiley and Sons, Inc., 2005.

Dropkin, Murray, James Halpin and Bill LaTouche. Bookkeeping for Nonprofits. San

Francisco, CA: Wiley and Sons, Inc, 2005.

Drucker, Peter F. Managing the Non-Profit Organization. New York: HarperCollins

Publishers, 1992.

McKee, Jonathan and Thomas W. McKee. The New Breed: Understanding and Equipping the 21st Century Volunteer. Loveland, CO: Group Publishing, 2007.

Ruppel, Warren. Not for Profit Accounting Made Easy. New York: John Wiley and

Sons, Inc., 2002.

White, Ellen G. Welfare Ministry. Hagerstown, MD: Review and Herald Publishers, 1952.

Module Outline

I. The mission of serving communities

a. Challenges and opportunities

II. The vision of serving communities

a. Concrete action on how to fulfill the mission

III. The need for margin even in a nonprofit organization

a. Margin and mission go hand-in-hand

IV. The nature of planning and structure

a. A dynamic and on-going process

V. Funding the mission

a. Budgeting as the key to financial stability

VI. Fund Accounting

a. Why nonprofits use Fund Accounting

b. Objectives of Fund Accounting

VII. Financial indicators/ratios

a. How to understand and use financial ratios

Teaching Notes

CS 05 Technical Aspects of Community Services Ministry:

Finances & Accountability

Basic Philosophy of Church-based Community Programs

There are at least 94 instances in the Old Testament where God speaks directly about the needy community in the times of Israel, giving instructions about ministering to their needs. However, it was God’s intention to make Israel a prosperous people. “. . . there should be no poor among you, for in the land the Lord your God is giving you to possess as your inheritance, he will richly bless you” (Deuteronomy 15:4, NIV).

But, the socio-economic reality of poverty has always been there ever since sin came into this world, and even among church-going Christians. “There will always be poor people in the land. Therefore I command you to be openhanded toward your brothers and toward the poor and needy in your land” (Deuteronomy 15:11, NIV).

There are also twenty or more allusions in the New Testament on this same topic. “Religion that God our Father accepts as pure and faultless is this: to look after orphans and widows in their distress and to keep oneself from being polluted by the world” (James 1:27, NIV). And there are many more.

Challenges to the Mission of Serving the Community

There is a staggering increase of poverty in the world, generating a need for resources to cope with this phenomenon, and a need to better understand the best approach in serving the needs of communities. Is giving aid enough? Or, should we “partner with the poor” in helping to break the cycle of their poverty?

There are 1,620,000 entries on this subject on the Internet (2009)! It seems like every country, many states, and local jurisdictions and other entities have some kind of plan to “break the cycle of poverty.”

The United Nations Secretary-General Ban Ki-moon recently (December 3, 2008) made this statement, “We need to do much more to break the cycle of poverty [and disability].”

What is the cycle of poverty? One definition states that “it is the set of factors or events by which poverty, once started, is likely to continue unless there is outside intervention.” Another definition says it is “a phenomenon where poor families become trapped in poverty for at least three generations” (Wikipedia, the free encyclopedia, 2009).

[See PPT slides 2 & 3.]

Challenges to the Vision of Service to the Community

[PPT Slide 4] How can the church preserve its identity and still identify itself with hurting people? Christ worked mostly from the periphery. He identified himself with those on the fringes, alienating those in the center—who ended up demanding His life. How passionate should we be about serving the community?

There is a concept that “the poor have a unique value system. The culture of poverty theory suggests the poor remain in poverty because of their adaptations to the burdens of poverty” (Wikipedia, on the “Culture of Poverty,” 2009). In a recent speech (October 30, 2008), Tasmanian Premier David Bartlett told his listeners, “I want to talk today about how we can break the poverty cycle itself by re-engineering the things that make it turn” (emphasis supplied).

Children are at the forefront of the poverty issue. As dependents on their parents or guardian, if they are in poverty then the children will be also. This makes it much harder since it is believed that poverty-related behaviors learned in childhood tend to make these behaviors more likely to perpetuate.

Another big challenge is the lack of education among the poor. A Sri Lankan website on “Breaking the Poverty Cycle” has this statement: “One way in which we aim to do this is by helping children master their spoken command of English.” The core issue here, however, is not only learning a key language but education itself as a whole.

From a study done in China, we get this assessment with the added component of finances: “For the poorest group of children, poverty is both a cause and a result of inaccessibility to education. Poor children are less likely to be enrolled in schools or to complete the basic level of education. For, even if schooling is free (a goal of the Chinese Government), uniforms, stationery, and transport are not. And these may still be well beyond the means of a poor family” (emphasis supplied). [See PPT slide 5.]

These are some of the challenges in serving a needy community, but this should make us all the more determined to provide church-based community services—because not only do we minister to the most vulnerable members in society, but it is also a clear mandate from God that we cannot take lightly.

Funding the Mission

Margin, or simply, funding, is critical to the mission of community service agencies. One reason is that the needs are growing, and secondly, as any other organization, they need to be financially strong to reach their goals and fulfill their mission.

The global and lingering recession (2009) is forcing many charities and foundations to make crucial and unexpected financial decisions. In many cases, nonprofit leaders and board members are confronting these decisions without knowing which questions to ask and without having a clear understanding of what these moves will mean to their long-term financial health (emphasis supplied).

New York, April, 2009: America’s nonprofits, including the “lifeline” organizations that so many depend on for food, shelter, and other basic services, are strained to the breaking point, according to a survey released by the Nonprofit Finance Fund (NFF). The survey of over 1,100 nonprofit leaders in markets nationwide (USA) captures the financial state and particular challenges facing these organizations. Key findings include:

1. Only 12% expect to operate above break-even this year.

2. Just 16% anticipate being able to cover their operating expenses in both 2009 and 2010, and another 31% have less than three months’ worth.

3. 52% of respondents expect the recession to have a long-term (2+ years) or permanent negative financial effect on their organizations.

4. 93% of lifeline organizations that provide essential services to the most vulnerable population anticipate an increase in demand in 2009.

“The survey reveals the precarious state of a sector that is continually asked to do more with less. Nonprofits plan to cut programs and [do] layoffs in the next 12 months. A recent lease of the Giving USA 2008 report, a publication of Giving USA Foundation, researched and written by the Center on Philanthropy at Indiana University, states:

“Giving in the worst economic climate since the Great Depression exceeds $300 billion for second year in a row.” However, it goes on to say: “Donations to charitable causes in the United States reached an estimated $307.65 billion in 2008, a 2 percent drop in current dollars over 2007.”

Other significant data in this report:

1. The 2008 number is the first decline in giving in current dollars since 1987.

2. Two-thirds of public charities receiving donations saw decreases in 2008. The exceptions were Religion, Public-Society Benefit and International Affairs.

3. Compared with 2007, 54 percent of human services charities saw an increase in need for their services in 2008; 30 percent saw little change in need; and 16 percent saw a decline.

4. For 2009, 60 percent of the surveyed human services organizations were cutting expenses, including cutting services or staff, due to funding shortages.

5. The type of human service agency most likely to be underfunded was youth development/serving children and youth.

6. Among organizations working to meet people’s basic needs (food, shelter, clothing, etc.), more than half (53 percent) said they are underfunded or severely underfunded for 2009.

In spite of the general decline in charitable giving in 2008, religious organizations, among others, saw an increase in giving during the year. Religious organizations received 35 percent of the total (estimated $106.89 billion). This is the second year this type of giving exceeded $100 billion, and represents a 5.5 percent (1.6 percent adjusted for inflation) increase. This shows that there is still good funding available for church-based organizations working to help the community. Aggressive and disciplined leadership will find that donors will give to those who can state their cause and their case in a compelling manner.

Planning

Careful planning is key to the success of any organization; especially during tough times. The planning function is considered so important today that there is even the “American Planning Association” with a monthly magazine, dedicated solely to planning and a website, . Here is what they say about their publication, Planning: “Every month, thousands of people—professionals and interested laypeople alike—read Planning to learn how innovative planning programs and techniques are reshaping America's communities.” Good planning frequently starts with a dream. Good projects also start with dreams of a desired outcome. The planning process generally leads to a workable model; from a dream to a reality. Dreaming is a virtue of progressive leaders and good planners.

Also, when a plan is considered no longer feasible or is in need of change, it should be flexible enough to make that happen. Careful planning minimizes the need for major future changes. Consider short term as well as extended plans. Be ready to adjust them when circumstances change.

Budgeting

More than just a list of income and expenses, the budget can become an incredible diagnostic tool.

One author (Rev. Jim Wallis) calls budgets “moral documents.” Realistic forecasting is key to a realistic budget, providing “predictive intelligence” instead of working from a “reactive” to a “proactive” management.

For some organizations budgeting starts early in the year. In reality, budgeting is such a dynamic function that it might be a constant process for some. If your accounting cycle is on a yearly calendar basis, we would recommend the following:

1. Start planning your projects for the next year in the month of March of the current year (or earlier).

2. In the second quarter, gather as much budget material as you can. Have each department or cost center (if applicable) flesh out all their plans for the next year, including expected expenses and revenues (if any).

3. In the third quarter, put on paper a preliminary budget for the coming year, and review it with management.

4. Once refined, prepare a draft for board approval.

Don’t forget to monitor regularly all aspects of the operation and check performance against budget.

Monitoring is an important part of internal control. Monitoring (at least every quarter) allows you to address any issue that might need attention before it becomes too late. It is recommended that the governing board of the organization review the financial statements periodically.

Fund Accounting

Contrary to regular (or cash) accounting, fund accounting operates a separate list of accounts for each sub fund. This allows for better checks and balances of each department or cost center. Most nonprofits use fund accounting in their operations. There are least six basic objectives for fund accounting:

1. Accountability and stewardship - Were the funds used as instructed and were they used properly?

2. Determining financial condition - How much can we do with our resources, including cash and non-cash assets?

3. Planning and budgeting – What should we do with our money and how much is needed to do the job?

4. Evaluating performance – Are we reaching the objective for each fund? How much is the cost? Measure our effectiveness and efficiency.

5. Determining and forecasting cash flow – How much cash comes in, how much goes out?

6. Communication – Are we communicating what our patrons or constituents need to know? Is the financial information clear, precise, relevant and reliable?

See material on Power Point.

Examples of certain funds typical in nonprofits

1. Agency Funds: held in custody for others

a. More typical of academies/schools that keep funds for student associations or clubs.

2. Restricted Funds: assigned to specific projects

a. For example, funds held in custody for a new vehicle, building, equipment, etc.

3. Unrestricted Funds: use for unrestricted operating needs

a. Funds received for general operations with no restrictions on their use.

4. Endowment Funds: donors stipulate use as a condition for the gift

a. Funds donated to generate income for the organization. Typically, the corpus (original amount) is kept intact over a period of time (or indefinitely) and only the proceeds can be used for either specific or general needs of the organization.

b. Endowment funds will generally have a document developed by the donor and the recipient at the time of the donation which will specify the conditions of the gift.

5. Plant Fund: Fund holding all the fixed assets such as buildings and major equipment

a. All property (land), buildings, and major equipment are part of the plant fund.

b. Some nonprofits have merged their plant fund into the regular operating fund, while others keep them separate.

c. The accounting guidelines (in the U.S.) allow for the merging of the plant fund into the operating.

See Power Point presentation.

Financial Ratios or Indicators

A ratio is the relationship between two items from the accounting records. These comparisons are not to be taken as absolute but rather as an indicator, a snap shot of the situation at a given moment in time to be used as a platform for further analysis and not an end in itself. Ratios can be a very valuable tool in evaluating and steering the organization away from pitfalls into a more secure financial route.

Some Types of Ratios:

1. Current ratio: current assets divided by current debt

2. Quick ratio: current assets minus inventory

3. Total debt to net ratio: total debt divided by net worth multiplied by 100.

a. This ratio tests the organization’s ability to meet its total obligations from equity or net worth.

4. Working Capital ratio: a test of the organization’s long term ability to function as a viable entity.

a. Calculation: current assets (cash and non-cash), less current liabilities (debts you owe)

b. The result from (a) is then divided by, let’s say, 20 percent of the previous year’s total expenditure, which would be considered the required working capital.

c. Example: $90,000 = actual working capital from (a) above, divided by $95,000 = required working capital from (b) above: 90,000/95,000 = 94.7% of the required working capital.

d. The ideal, of course, is to have 100%, a ratio of one to one (1:1); one dollar in assets (cash and readily convertible papers, receivables, etc) for every dollar of debt you owe.

e. However, many institutions run at a lesser ratio level but constant monitoring is needed to take action when circumstances demand a change in course to avoid running out of working capital which will lead to bankruptcy.

5. Cash Liquidity ratio: measures the organization’s ability to pay its debts and still have resources to function properly.

a. This is a critical ratio. Some organizations may even have a good working capital but poor liquidity (cash).

b. Example: a school or college may have a large amount of money to collect from students (assets in the form of accounts receivable), but very little cash to pay their obligations.

c. So, your working capital may look good with a large asset in the form of Accounts Receivable, but not enough money to pay your bills.

See Power Point presentation.

Conclusion

Clara Miller, President and CEO of Nonproft Finance Fund (NFF), noted pointedly, “This crisis (global financial meltdown) presents funders and government with an opportunity to substantively change practices that perpetuate inefficiency and stymie innovation and growth. The talent, resources, and passion that people in the sector bring to the goal of addressing society’s most pressing issues must be protected and nurtured. This recession (2009) is forcing the issue of how to better invest in what works for the benefit of society.”

These difficult financial times should encourage leaders to sharpen their leadership abilities, assessing carefully all projects, testing every assumption because not every project will. Peter F. Drucker once counseled Rick Warren, Pastor of the Saddlebrook Church, who asked the late guru for advice: “Don’t tell me what you’re doing, Rick. Tell me what you stopped doing.” It is important to know when to start but it is also important to know when to stop.

Today’s nonprofit leaders face new challenges that demand a good understanding of how supporters and volunteers view leadership. A wise leader will learn to adapt to new trends in people management as well as to the changing financial situations facing nonprofits.

Survival and success for nonprofits will come largely by knowing how to navigate these changing times and making the best use of the available resources.

Be the leader with that kind of insight!

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