Optimal Capital Structure

I have been taking a class in finance this semester and the current topic is optimizing the capital structure of an organization.  The class strategy basically involves how much debt, stock, and preferred stock a company should have so that its cost of capital is as low as possible.  In that there is a tax advantage to having debt, the correct combination typically involves assessing how much debt will cause a company to be viewed as risky because at that point all of their sources of capital can get more costly.

So I was trying to figure out if there was any correlation between this corporate strategy and anything I would apply to my job in the church.  We don’t pay taxes and so from that perspective there is not advantage in debt.  I wondered then what is the advantage of debt since a large number of church’s have debt there must be some advantage, right?  Is having a new something (building) worth being only able to use 85% of the contributions for the next 30 years?  Would you be better off using the existing facilities and saving some to meet the costs up front?

Then I started thinking about the other side of the equation, how much cash should a church amass if any?  Obviously, you want to make sure you are going to meet your payroll obligations and can pay the heating bills.  But how much should be kept in reserve?  People don’t give their money so that it can be piled up in some bank somewhere and yet they don’t want their church to have to beg the bank for money to pay bills if the contributions don’t come in as they were forecasted.  Where is there an appropriate balance between having faith and being prudent? 

I think we are trying to get three months worth of expenses saved before we try to spend 100% of what we collect.  Our parish is near this point and so the question has now become what should we do if money accumulates over this three month’s expense threshold?  You have to be careful when you choose to increase your expenses because the trends show that expenses increase faster than contributions for most years to begin with.  So if you add a recurring expense that expense will grow faster than the contributions that pay for it.

My final thought was wondering how much a parish should give.  Some parishes take their 10 percent tithe and give it to other organizations.  They are ‘setting and example’ for parishioners to use.  I guess this might make sense but I guess it might make more sense to let the parishioners give money to the organizations themselves since you are re-giving their contributions in the first place. I suspect that most parishioners who give to the church give to other causes and to give more of their money to other organizations seems like it’s redundant.

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Tags: church economics, debt load, Economics