On the topic of financial risk...

In the post covering financial risk, I discussed how churches need to think about the risks facing both their revenue and expenses. This week, another risk for an org's finances came painfully apparent to me.

For the last month-and-a-bit I've been managing a retail pop-up store along the outskirts of Toronto. The store itself is owned by a huge publishing company, and it sells cheap books, Christmas gifts and decorations, DVDs, and children's toys. It's nothing fancy (I was given a large, empty room and turned it into a nice little place in under a week), but shoppers seem to like it enough and our sales have been pretty strong. With the exception of a few isolated incidents involving irate customers or absent employees, the job's been pretty fun.

Last week, however, we all suffered a bit of a jolt. After doing some basic forensic accounting, I determined that hundreds of dollars had gone missing from the store's cash registers over the course of a few weeks. Evidence points to one of my (former) employees, but it's likely not going to be enough to have him charged with theft. The whole incident has left myself and the other employees frustrated and downhearted; we all trusted this guy, and he betrayed us.

Theft is going to happen in any business and industry: just today there was a story of Apple, one of the tightest-run organizations in the world, getting robbed during New Years' celebrations. From shoplifting to corporate embezzlement, money can easily go missing, never to be seen again. This is even easier when accounting methods are lax: the cash machines at my store are very rudimentary, allowing for money to be removed every day without appearing suspicious (it was only when I looked back at weeks' worth of data that I saw the trends). And for companies with billions of dollars of assets, is it any wonder that there are frequently stories of top-level managers getting caught with their hand in the cookie jar?

Churches need to be just as aware of this. As great as it would be to trust that all congregants will worship at a church will obey the eight commandment, it's still imperative to have a system in place that reduces the risk of theft. Simple initiatives, such as having two or three people count the collection money after each service, and minimizing how long cash stays within the church walls (or investing in a quality safe should it need to be there for a few days), can go a long way in eliminating any "sticky fingers." Similarly, routine audits of assets, and an atmosphere that encourages someone to speak up if something seems wrong, are great ways to stop embezzlement or mismanagement of funds.

I've learned the hard way that theft can happen anywhere, even at a small pop-up store with a handful of employees. Does your church have a plan to ensure that all the money given to it is used properly, and not pocketed by some unscrupulous hands?

Risk #2: Operational Risk: An Overview

One of the benefits of implementing risk management in a church is that many aspects will already be familiar to congregants. For example, much like religion, risk management is open to a wide variety of ideas and interpretations, with some pushing practices and protocols forward, while others seem to just create confusion. Even simple words can have many different definitions and meanings, with each thinker arguing that they are in the right. For Christian churches, this is nothing new.

Operational risk is one of those terms that no one can seem to agree on. The size and scope of an organization's "operations" is up for debate and is unlikely to be resolved anytime soon. Fortunately, just like theological differences, not everyone had to agree on everything to still move forward. What is important here is that, though there may be some differences, the general definition of operational risk is the uncertainty surrounding, and likelihood of non-ordinary events occurring out of, an organization's internal processes and systems, its people and human resources, and external happenings.

That's one heck of a definition, so vast that almost anything could count as operational risk. For those not steeped in risk management understanding (and, really, even for those who are), defining and managing an organization's operations can be incredibly intimidating. For a church committee, it may appear nigh-impossible.

Of course, it really isn't. Using the above definition of operational risk can help open up the risks that have been hiding in the church. The first part, processes and systems, raises questions about the decision-making processes used: are they effective and efficient? could they allow for unfair manipulation? what would happen if a member of the process suddenly became unavailable? Similarly, the church's people and human resources are a key (if not the key) factor in its success. Are the staff enjoying their jobs, or do they feel stressed and worn-out? Does the church have a plan should someone decide to leave? And finally, external happenings ask congregants to consider what outside events could affect the church--this can range from weather to roadwork and construction to political legislation.

Analyzing operational risk isn't always easy, or fun, but is crucial to keeping the church running smoothly. As this blog will show in near-future, there are many large-but-accessible operational uncertainties that can be analyzed and improved upon. Even just a few quick changes can put a church on the right path, away from unnecessary risk and towards better, more-efficient operations.

Risk #1: Financial Risk--An Overview

Risk management is not entirely about financial risk. In fact, when it comes to churches, financial risk is likely not even the biggest type that clergy and congregations face. And yet, within a house of worship, financial risk is ubiquitous. Budgets dictate just about every congregational activity, from outreach to parties. Costs are a frequent worry of anyone looking to endeavour on a major project. Offering is collected right after a fiery sermon. The most emotional use of the Lord's name comes when calculating revenue and expenses. If a church wants to keep its doors open, it has to be able to pay.

Some of the risks associated with finance are obvious: there is always a good deal of volatility to congregational donations, which make up the vast majority of a typical church's revenue. Such a financial model is particularly risky because there are several factors that influence it's uncertainty: both overall attendance and the generosity of those who attend are key elements in keeping revenue up, and both are susceptible to extreme change each week. Many churches find that givings ebb and flow, decreasing in the summer and spiking close to Christmas and other holidays, which can create difficulty in paying the steady expenses.

This leads to another, equally-important risk. A church's expenses determine how efficiently it can run and how much of its money can be used for external missions and outreach. Despite this, it is often given a secondary focus to revenues, perhaps because revenues are easier to approach from a full congregational standpoint. This can be dangerous for a church to do: expenses, from salaries to utilities to physical materials, are as much a concern for everyone as are revenues. Failing to see and address this risk can wreak havoc on a church's budget.

When a church starts openly discussing the uncertainties that surround its cash inflows and outflows, numerous smaller risks will come to the surface. Have certain expenses been rising too quickly for comfort? What sort of contracts has the church locked itself into, and what problems may arise from that? What has happened to average givings over the course of one, three and five years? What possibilities are there to cut expenditures? These are not always easy, or pleasant, questions to answer, but are far better being asked than ignored.

Evidently, financial risk goes deep in any organization, leading to numerous elements and particulars that need to be discussed. But it's never too early--or late--for a church to start looking at its finances and asking the tough questions. A few years down the road, it may be very glad it did.