HELPING LEADERS BECOME
B E T T E R S T E WA R D S .
FINANCIAL MANAGEMENT STRATEGIES Presented by: First Bank Community First Financial Resources Division
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CHURCH EXECUTIVE • F I N A N C I A L M A N A G E M E N T S T R A T E G I E S
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Table of Contents FRAUD PREVENTION: ARE YOU DOING ALL YOU CAN?
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Banks are in the business of risk management — so, who better to help your ministry manage fraud and the onslaught of cybercrime making news almost every day? By Therese DeGroot
BEST PRACTICES: INSURANCE REVIEW AND PLANNING
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The loan underwriting process is centered on determining the level of risk associated with each ministry. As a part of that risk management process, we inquire about the amount of debt, cash reserves, as well as the limits and type of insurance coverage the ministry maintains. By Therese DeGroot
WHAT ARE BANKS LOOKING FOR?
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Long-term interest rates appear to have bottomed out and are projected to increase by year-end. So, now is the time to consider borrowing funds to undertake important building initiatives or refinancing existing debt. By Therese DeGroot
In future installments, experts from First Bank’s Community First Financial Resources Division will present best practices for solid stewardship of your church’s financial resources.
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F I N A N C I A L M A N A G E M E N T S T R A T E G I E S • CHURCH EXECUTIVE
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FINANCIAL MANAGEMENT STRATEGIES
Fraud prevention: are you doing all you can? By Therese DeGroot
Banks are in the business of risk management — so, who better to help your ministry manage fraud and the onslaught of cybercrime making news almost every day? Ministries are very familiar with the value of insuring their physical property and assets against potential loss. But, they don’t often think about their bank accounts. Losses due to payment fraud can be so significant that it might take years for the ministry to recover. Fraud risk can be both external and internal. The management of this risk is a key issue as current estimates place payment fraud in the billions of dollars. The 2013 Association of Financial Professional’s Fraud Prevention Survey reveals: • 60 percent of surveyed respondents experienced payment fraud or attempted payment fraud. - 82 percent experienced actual or attempted check fraud. - 42 percent experienced actual or attempted credit / debit card fraud. • $23,100 was the typical loss due to payment fraud. Fraudsters attack from both inside and outside the organization. Ministry leadership can mitigate fraud by implementing improved controls in tandem with strategic Treasury Management services offered by banks. EXTERNAL FRAUD • Payment fraud: check fraud • Online attacks: account takeover, social engineering, database breach External parties continue to prey on ministries. When you pay a business partner with a check, you are providing two key pieces of information (route & transit and account number) that could allow for unauthorized access to the ministry’s checkbook. Check fraud is still the No. 1 way in which payment fraud is attempted. Although check volume is declining, ministries continue to use checks as the primary payment mechanism. The 2013 Federal Reserve Payment System Report states that business-to-business checks represented 28 percent of the 21 billion checks cleared in 2013. Check fraud can occur in a variety of ways, including stealing account numbers and bank routing numbers to create fraudulent checks and check washing, which involves changing payee name and / or amount written. Ministries can protect themselves from check fraud by considering alternate payment methods such as ACH, which reduces the number of checks written. A daily review of transactional activity through the bank’s online banking portal will quickly catch a fraudulent item that clears the account. To stop fraud before it occurs, ministries can use services provided by banks, such as Positive Pay and ACH Block / Filter. These services allow ministries to review certain clearing items to determine if they are valid. If items are not valid, the ministry rejects the item and stops the fraud before it can occur. 4
CHURCH EXECUTIVE • F I N A N C I A L M A N A G E M E N T S T R A T E G I E S
Online security attacks are an ongoing challenge. Ministries must constantly educate their staff and volunteers to be on their guard for attempts to gather confidential information which might lead to account takeover or data breaches. Fraudsters develop sophisticated techniques in an effort to gain access to secure logon information from ministry staff, such as phishing, spearing, smishing and social engineering. Ministries must establish online protocols to block staff and volunteer access to certain websites and invest in robust anti-virus software to protect company systems from external attacks. Staff and volunteer education is also a critical component to protect the ministry’s network. Ministries should consider a dedicated PC used only for access to the bank portal, which is a step to keeping this PC safe from unintended viruses. INTERNAL FRAUD • Fraudulent vendors • Expense reimbursement • Check tampering • Cash theft One of the most devastating types of fraud occurs from within. Ministries trust staff to manage payments and conduct themselves in the best interest of the ministry. Unfortunately, an employee sometimes takes advantage of that trust and misuses his or her access to defraud the ministry. Fraud perpetrated by trusted — often long-term — employees is devastating to the morale of the ministry, as well as its reputation. With cash being such an important part of any ministry (large or small), controls must be established and monitored around cash handling. churchexecutive.com
The opportunity for internal fraud can be deterred by establishing best practices, including: · Perform exhaustive reviews of budget reports — review journal entries, cash disbursement activity and a budget to actual analysis · Invest in the services of a CPA to prepare an audit or review of your financial statements and perform a review of your accounting practices • Separation of duties — Account Receivable and Accounts Payable should be handled by separate employees. • Random checking of vendors and invoices for legitimacy • Bank account reconcilement services • Payroll audits • Securing and restricting access to check stock • Establishing dual control for all online payments — including initiation, approval and validation of payments. A CULTURE OF ACCOUNTABILITY As important as it is to establish strong policies and controls, it is equally important to audit adherence to those polices. Doing so is a key factor in the ability to provide an environment of autonomy and manage risk. A ministry can thwart the efforts of fraudsters trying to profit from illegal payment activities by creating an environment of awareness, vigilance and by establishing controls within the ministry. A well-organized financial team with defined roles and responsibilities, meaningful policies and consistent audits of policies and financial statements — as well as ongoing employee education — are the keys to creating a climate where everyone is aware of fraud and knows the proper steps to protect the ministry. Therese DeGroot has developed and managed religious lending programs for 25 years for many banks that now specialize in lending to churches, nonprofits and schools. She is Managing Director of First Bank’s Community First Financial Resources Division www.cffinancialresources.com in Lake Forest, CA.
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FINANCIAL MANAGEMENT STRATEGIES
BEST PRACTICES: insurance review and planning By Therese DeGroot
The loan underwriting process is centered on determining the level of risk associated with each ministry. As a part of that risk management process, we inquire about the amount of debt, cash reserves, as well as the limits and type of insurance coverage the ministry maintains. Responses generally include the current loan amount, existing cash on hand, and the policy limits of property and liability insurance coverage. While most ministries understand the importance and value of adequately insuring their physical property and assets against potential loss, many don’t think about insuring their most important assets: the key people responsible for executing the vision of the ministry. With the important task of “Building the Kingdom,” insurance is critical. It not only protects the ministry and key staff but can also be an important benefit in recruiting and retaining key staff so they feel financially secure and can direct all their energy towards the ministry. Insurance is critical in safeguarding the ministry and solidifying the budgets and financial plans of both the ministry and staff. Therefore, an annual, comprehensive review and evaluation of Life, 6
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Disability and Long-Term Care Insurance needs and offerings is a best practice, along with determining cost-effective solutions for the ministry and staff. An insurance review will determine if the ministry: • Has the proper amount of Property, Liability, Life, Disability and LongTerm Care coverage • Has the type of insurance that best fits the church’s needs • Has adequate liquidity and cash reserves to fund potential losses • Is paying a cost-effective price • Has the appropriate beneficiaries and assignments. Life insurance The discussion around life insurance should also include succession planning. While life insurance provides immediate liquidity upon death, there should also be a formal succession plan in place. Ministry lenders — and most ministry boards — know how important both are when a senior pastor or key employee passes, and require it as a condition of a loan. Knowing the financial obligations of the church are met allows the ministry to feel safe and secure while implementing a sound succession plan and / or searching for a new senior pastor or key person. When properly structured, this death benefit makes the unexpected and significant transition smoother by funding a possible reduction in tithes and offerings, assisting the family in meeting important financial goals and guarantees that the ministry continues as planned, even when faced with the untimely death of a pastor or key employee. Disability insurance A disability can be more financially disastrous than a death. The ability to earn a living is one of the most significant assets there is. A pastor or other key person unable to continue to earn income due to an illness or injury could be financially devastating for the person, as well as a setback to a ministry.
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Disability insurance benefits can be used to preserve independence, provide time to recover and / or retrain for a new job while conserving assets. If pastors or key leaders do not have Disability insurance, many ministries choose to continue to pay them for some period of time in an effort to respect the contributions this person has made which can place a financial burden on the ministry. Consider offering this important insurance benefit to key leadership as part of a compensation package which will ensure both the ministry and family are provided for. Long-term care insurance Another important insurance benefit the ministry can offer to key leadership, and might or might not choose to provide as part of its compensation package, is Long-term care insurance. An aging populace and medical care inflation are key in determining if personal assets are sufficient to pay for in-home care, an assisted living facility or a nursing home. Long-term care insurance is an affordable solution to personalize your choice of care options, protect your assets and preserve your freedom and dignity. The primary value of insurance is that it is a cost-effective way to shift or mitigate the often overwhelming cost of risk. Insurance offers several advantages not available from any other financial instrument. It provides peace of mind and an infusion of cash for dealing with the adverse financial consequences of events that could significantly impact a person and or a ministry. It is critical for leadership to review coverage annually during the planning and budgeting season to ensure this important risk management tool is appropriately used. Therese DeGroot has developed and managed religious lending programs for 25 years for many banks that now specialize in lending to churches, nonprofits and schools. She is Managing Director of First Bank’s Community First Financial Resources Division www.cffinancialresources.com in Lake Forest, CA.
F I N A N C I A L M A N A G E M E N T S T R A T E G I E S • CHURCH EXECUTIVE
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FINANCIAL MANAGEMENT STRATEGIES
What are banks
looking for? By Therese DeGroot
Long-term interest rates appear to have bottomed out and are projected to increase by year-end. So, now is the time to consider borrowing funds to undertake important building initiatives or refinancing existing debt.
When refinancing a loan, be sure that the calculation of money saved by refinancing to a lower rate includes all costs, penalties and — if an interest rate swap is involved — breakage fees incurred to refinance. Securing a low, fixed-rate loan now will allow for proactive budgeting, predictable debt service and ensures that ministry and outreach programs continue to be funded, as well as expanded ministry. An important component to this process is finding a bank that is experienced in church lending. A bank that understands the unique nature of how churches operate is critical (including the unique cash flow nature of churches), as is as a bank that is well-capitalized and liquid. 2 key strategies So, what are banks looking for from churches to determine which are the best borrowers deserving of the best rates? Keep in mind: presentation is everything. A well-organized, professional and thorough loan package that represents how important you believe your stewardship responsibilities are is a must. The better the quality of your information, the more successful you will be in securing the best financing available at the best rate. Making the bank comfortable that checks, balances, processes and procedures are in place will be beneficial in terms of loan amount and the best rate available. Lenders want to be sure the organization has a well-run business office with proper accounting and financial systems in place with appropriate controls and best practices. This will help in the preparation of financial statements, capital campaign information and treasury management reports, as well as guard against possible embezzlement or fraud. Developing comprehensive business practices will improve the business office and the quality of information. Quality financial statements will keep the church above reproach and should be considered a best practice. When requesting financing, it benefits the organization if the lender knows it is an important part of your stewardship responsibility. Have at least three months of operating cash reserves on hand. In lending through the Recession, one positive factor that clearly determined strong leadership and the sustainability of the ministry was adequate cash
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on hand. Those churches that maintained appropriate liquidity were able to manage through the tough cycle while not severely cutting back on staff or ministry and outreach programs. Strong cash reserves also made the church a stronger borrower; in turn, this presented these churches as a lower risk, so they were able to secure a lower rate. Refinancing and / or increasing your debt now provides not only the opportunity to fix or lower your interest rate, but also to consider other important initiatives — building projects to expand program development and community outreach, for example.
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While doing the necessary preparation and due diligence to be a good bank prospect requires effort, it is well worth the time. A lower rate and the right financial partner will support the vision of your church and put you in relationship with a lender you can trust through the expected and unexpected challenges of every ministry. Therese DeGroot has developed and managed religious lending programs for 25 years for many banks that now specialize in lending to churches, nonprofits and schools. She is Managing Director of First Bank’s Community First Financial Resources Division www.cffinancialresources.com in Lake Forest, CA.
F I N A N C I A L M A N A G E M E N T S T R A T E G I E S • CHURCH EXECUTIVE
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