A group of friends get together, hang out, have fun, and share life. As time goes by, they recognize they are all passionate about their faith in Christ and move from a growing weekly Bible study group to starting a full-blown church. Things will continue to get complicated from that point forward, especially regarding finances. And if the church purchases a facility, buckle up because there are repairs, renovations, remodels, retrofits, and more that will take large bites out of the church finances. And with so many competing financial needs, churches constantly wrestle with the ideal way to fund everything.
The church budget is the best way to ensure the finances fund the church’s mission and vision. In addition to financially supporting ministry costs, church budgets include operating costs. But what happens when the church needs to buy property, add a playground, replace aging equipment, or renovate the worship center? Significant expenses like these require planning, forethought, and discipline. Trying to pay for them all at once out of the general fund could devastate the rest of the budget and take the church off mission. Churches must set up Capital Improvement Funds (CIF) and sinking funds to avoid that kind of catastrophe.
What’s the difference?
In some ways, a CIF and a sinking fund are similar; both are sums of money accumulated for a particular purpose. CIF and sinking funds can build over time from the church budget or direct donations from the congregation. And CIF and sinking funds typically impact the facility or facility-related projects. But there are differences.
What is a CIF?
Typically, when a church is about to purchase property and begin construction, the transactions are capitalized under the Generally Accepted Accounting Principles (GAAP). The church can also capitalize all equipment, goods, and services related to the project. Renovations and associated costs to the facilities also fall into the CIF category.
Churches looking to purchase property, build a new facility, renovate their existing facility, or add a structure like a playground should designate a capital improvement fund. Churches with a CIF usually cast the vision of the upcoming project and allow the church to donate directly to the fund. Some churches may designate a portion of their operating budget to accelerate building this fund.
What is a Sinking Fund?
Sound systems, roofs, HVAC units, flooring, and paint all have one thing in common – they wear out and need replacing. Sinking funds are a way to acknowledge this fact and address these upcoming costs before they happen. Large ticket items like these usually have a life span of ten to twenty years when cared for, and that’s good news for building sinking funds. Here’s a simple formula to follow when determining the financial impact of a sinking fund on the annual budget – Estimated Cost divided by Life Expectancy divided by the Number of Years Left to Replacement. Here’s an example:
- Life expectancy: 10 years
- Estimated cost: $50,000
- Annual amount needed to replace in 10 years: $5,000 (that’s less than $420 per month)
If the church didn’t start the sinking fund on a 10-year replacement item on time and only has seven years left until replacement, then the annual cost is higher. The math is pretty simple, but it takes forethought and discipline to designate the money into a fund for future use.
For churches with facilities creating sinking funds for large ticket items is a must. It may be hard to set aside money month after month for years when immediate financial needs in compensation, operations, and ministry exist. But it’s good stewardship of the resources and avoids a major financial situation when aging equipment requires replacement.
For churches looking to purchase property, add new structures, or renovate their existing property, a capital improvement fund is a great way to allow the congregation to join in on the effort. The key is demonstrating good financial management (stewardship) with the resources God entrusted to your church.short url: