Most organizations need a certain amount of liquidity on hand to be successful. Liquidity helps institutions have sufficient working capital, emergency reserves, and financial fuel for future opportunities.
We raise this topic as a corporate governance matter for church boards. Leaders are responsible for ensuring the church has the necessary resources to meet all needs. Liquidity is an issue that deserves the board’s full attention.
Liquidity is generally defined as cash or other assets that can be quickly converted into cash. Cash includes bank deposits in checking, savings, and other accounts with no restrictions on withdrawals. Liquidity can also be other forms of property that has a ready market for a fast sale.
Church liquidity is important for at least four reasons. The first of which includes compliance with contracts or loan covenants. Churches that have outstanding loans usually must comply with credit stipulations. A common requirement is a demand by the lender that the church maintains a minimum amount of cash on hand.
The second reason for liquidity importance is to meet working needs. Most organizations face operating costs. Expenses include utilities, office overhead, salaries, and building maintenance. Adequate levels of liquidity ensure the church’s basic demands are met.
The third reason for liquidity is to meet emergency needs. Occasionally, expenses arise that catch management off guard. Emergencies include local economic shocks that hamper the community. This can be a weather-related disaster or the closure of a large employer. Emergencies also come about due to large, unexpected capital improvements.
The fourth justification for liquidity is to have a war chest for sudden opportunities. Church officials may uncover prospects to enhance the ministry by investing in a certain outcome. Take for instance an opening where the church can expand community outreach by purchasing supplies to meet a pressing need. Having sufficient liquidity on hand may afford church leadership the ability to exploit prospects.
Liquidity can help a church expand its reach. The lack of liquidity may limit leadership’s options for the future.
Church boards should understand the dynamics liquidity play in overall financial management. Board members can help the church monitor fiscal performance and strategic planning.
Boards should receive relevant reports to ascertain the church’s liquidity levels. Liquidity can be measured in dollars or as a ratio. In either instance, the church leadership should have established metrics, limits, and thresholds to gauge liquidity adequacy.
Liquidity can also be obtained with a line of credit. The board may acquire a source of contingency liquidity through a commercial bank or other lenders.
All lines of credit are not created equal. The interest rate, fees, and conditions often vary. Directors who shop around may be able to obtain more favorable terms.
Finally, church leadership should discuss and determine how much liquidity is needed. The answer will depend on several factors:
- Future Capital Improvements: Older equipment such as HVAC, sound systems, and furnishings will eventually need to be replaced.
- Weather Risks: The likelihood of damage from adverse weather such as storms is an important risk for which management should be prepared.
- Ministry Growth: Leaders who anticipate rapid growth should expect to incur higher operational costs. Extra liquidity prepares for a growing congregation’s needs.
- The Vision: The aspirational hopes of the church should play a role in liquidity management. A sound financial plan is critical to management’s achievements.
The liquidity needs of the church is an important consideration for its leaders. The governing board should take liquidity into account when managing today and planning for the future.