A strong platform for managing the church budget begins with the chart of accounts. For any non-accountants reading this, a chart of accounts is simply a list of the church’s general ledger accounts used to generate financial statements. The accounts are listed according to where they appear in the church’s financial statements beginning with the balance sheet and running through the income statement. The accounts as they appear in the church’s income statement should be an exact replica of the church budget. Frequently this can be a problem with churches using financial software designed for businesses. Because the financial statements generated by the software system look like a business, the church will resort to spread sheets to develop a budget. Unfortunately, this makes mid-stream budget analysis difficult.
A financial reporting system that keeps the church truly informed is the next requirement. A church should generate timely financial statements (usually monthly) that generate not only results of activities but also a meaningful budget vs. actual comparison. To be meaningful, the budget must be broken down by month but NOT simply by dividing the annual budget into 12 equal amounts. Annualize the budget by incorporating the natural trends in all accounting years. (For example, receipts will be much higher in December than July…) Also, hardly anyone does this but try to include designated/restricted gift activity in reports. It’s perfectly permissible to budget for these types of gifts.
Now it is time to turn to our fourth and final category, budget administration. It doesn’t matter how much time a church puts into budget development or even prayers for that matter, if plans are not put in place to administer the budget once it is implemented. Not providing adequate oversight of budget administration is not much different from not having a budget at all. In my opinion there are four key ingredients to making all of a church’s budget planning pay off. Sufficient church budget administration includes:
- Having a strong platform in place
- Keeping an eye on cash receipts
- Controlling spending
- Managing cash
Done correctly, budget planning is a time consuming process. A church should not build the rocket as it is launched! Effective budget planning starts well before the budget year begins. The following is a suggested budget development schedule based on a March 31 year end. Notice that the work begins six months before day one of the fiscal year being planned.
Establish a calendar to chart the process
Review the church mission, vision and strategy
Develop ministry goals for the coming year
Project expected revenues, fixed or ongoing costs
Determine available funds
Distribute budget request packets to ministers/laity/teams charged with budget responsibilities
Completed budget requests returned to the budget development team
Requests are reviewed/approved
Preliminary budget developed
Nothing!
Final analysis of budget
Adoption
Stewardship emphasis
Implementation
The purpose of step five is to make sure the church is on mission in its budget planning. In step five the church takes one last look at its budget before moving into the implementation stage. This should include a critical analysis of all budget requests submitted by ministerial and lay leaders confirming that the requests are within dollar amounts previously established and consistent with the church’s mission and vision for the next year.
- This should be done BEFORE the adoption and implementation of the budget. To do otherwise would open the church to the discouragement and disillusionment we discussed in a previous post. It is hard to undo this kind of damage…
- However, it is a good practice to perform this step at mid-year to determine if realignment is necessary. Budgets are not written in stone, they are to serve primarily as a guide.
A few of the questions that need to be addressed during this process are:
- Are our numbers in alignment with our mission?
- Are we balanced between in-reach/outreach?
- Should any of these budget items no longer be funded? (Are they carrying out our vision/mission/strategy?)
This may be the shortest post in the budget development discussion but it is the most important. The purpose of step four is to allow church staff to PLAN WELL for the upcoming church year. And, this will be impossible if the church does not COMMUNICATE well.
The allocation decisions must be clearly communicated to staff and lay leadership. Knowing how much money is available for their area of responsibility:
- Frees leadership to plan the current year
- Allows them to submit realistic budget requests.
Step three involves the allocation of the available funds to various church activities as determined by the mission of the church. It must be stressed; there is no one way to do this because each church has its own specific calling and there is a wide array of ministry focus points among churches. But, in my opinion, there is a universal truth – The best practice is to assign the task of allocation to a combination of staff/laity/committees/teams. Don’t leave it to a bunch of accountants on the finance committee…
The following is one process many churches employ:
- Start with personnel costs. In one sense, churches are in the “service industry”. Like other service providing entities, payroll costs will normally be the largest budget allocation. Typically 50% of the budget will be allocated to salary and personnel costs.
- Next come facilities costs, which include mortgage or rent payments, insurance, utilities and routine maintenance. Historically, a healthy range has been 20 – 25% but in recent years, due to the economic slowdown, churches have been exploring alternate ways to provide meeting space. The largest alternative probably is the concept of satellite churches. Rather than building massive, mega church facilities many churches are instead opening “branches” in smaller lower cost facilities. (Refurbished strip malls for example)
- The next category, missions and evangelism (outreach) will vary greatly from church to church due to variances in missions and vision. Typically this includes foreign mission support, local community outreach and evangelism, and social needs (clothing, food, health care, etc.) 10% is common but churches using alternate ways of providing meeting space have been able to increase the amount they can spend on outreach
- The last category is local church programming (In reach) which are the primary ministry activities directed to church members. These include Sunday School and discipleship, vacation Bible schools, Christian education, recreational activities and day care services among many others. 20% is common.
The purpose of Step Two is to allow church ministers and lay leaders to know “how much they will have to work with.” This is extremely important on two levels:
If ministers are given too low a figure, they may become discouraged even before the fiscal year begins. They may begin to think and mull questions like these in their minds:
“Do they think I am a miracle worker?
“This is an impossible task.”
“What’s the point?”
“I think I may be at the wrong church”.
On the other hand, if the ministers are given an unrealistically high amount to work with they will most assuredly become discouraged during the fiscal year. This is a frequent occurrence with the “dream big” budget method. Often, the ministers do exactly what they were asked, dream big. And usually, the dreams are bigger than the resources. The inevitable result will be failure which may breed discouragement. Dissension may not be far behind.
The best way to avoid this is to start with what you’ve got! Try to project what the church’s revenues will be for the upcoming year. Do not simply increase last year’s budget as things might have changed significantly since then. Try to use “real” giving numbers.
Just like the investment advisor’s standard warning, “Past results do not guarantee future results”, what happened in previous years may not happen in the next year at a church. But, past giving activity is a good place to start. First, take a look at the church’s receipts over the last three years or so. Also, take a good look at attendance levels to see if any noticeable trends are present there as well. Combine these two data points to make as good a prediction as possible of what the church expects to receive in offerings in the next year.
Next, the church should turn its attention to the expense side of the ledger. The first step in this process is to calculate the cost of simply “keeping the doors open”. In most churches this will consist of personnel costs, facilities costs, and denominational commitments. Deducting these costs from the projected revenues results in a more realistic estimate of the dollars the church has available for ministry. Ministers then should have a realistic idea of how much money they have to work with to carry out their particular part of the church’s mission.
The purpose of Step One is to make sure you are staying on “mission”. This is accomplished by reviewing the church’s mission, vision and strategy.
Each church needs to know three things:
– Who it is. (Values)
– Where it is going. (Mission)
– How it is going to get there. (Strategy)
Without knowing these things and applying them to the budgeting process, the church budget will be nothing more that predicting income and CONTROLLING how it is spent. This normally plays out in simply making sure the church stays within its means. Staying within budget parameters is not a bad thing. But, even though the church does not overspend, if it is not DIRECTING the church’s resources towards activities consistent with values, mission and strategy, the budget may end up being a failed exercise.
KEY: THIS STEP MUST COME FIRST!
There is no one way to do a church budget. There are a variety of approaches and for the most part, no one way is better than the other. Remember mission and vision? These two factors will also impact how a church goes about its financial planning. I do have to point out however, that even though I say there is no single way to do it right, there are definitely ways to do it WRONG. I have included one of these “must to avoid” approaches in this post.
Here are some of the more popular types of budgets:
- Program Budget – Organizes proposed expenditures in terms of the cost of each program to be carried out
- Performance Budget – Emphasizes measurable performance so that input costs can be compared with output benefits
- Line Item Budget – Budget amounts carry over from the previous year and are then adjusted to current year expectations.
- Zero Based Budget – Prior year amounts are “zeroed out” and we start all over again…
- Ministry Budget – Dollar allocations are based on ministry goals for the year.
- The “Dream Big” Budget…..
As I mentioned above, most of these approaches work effectively. However, in my opinion, I need to express my skepticism about two, one should be approached with caution, the other should be avoided.
- The line item budget has one weakness. Just rolling the prior year forward can be dangerous if the church does not have some type of review of the effectiveness of the ministry each year. If no review is present, churches may continue to fund projects that have not supported the important missions and visions of their congregations.
- The “Dream Big” budget should be avoided. Churches that use this system instruct their ministers to come up with a budget for what they want to do the next year “if money were not an object…” Invariably this approach leads to unrealistic budgets and worse, unmet expectations, resulting in discouragement of both the staff and congregation.
I ended the last post by asking, “Are these definitions sufficient?” Obviously the answer is no because that would be the end of this blog series! Keep in mind that the three definitions posted were all written by accountants… As a result, the main flaw with these definitions is that they appear to be about only CONTROLS & CONSTRAINT. There is much more to a church budget than these two aspects, contrary to what many finance committee members might think…
These definitions are missing three key words. See if you can spot them in these additional definitions:
- A strategic budget guides the church in allotting and spending its money in congruence with its deep, defining core values to accomplish a specific, biblical mission and a clear, compelling vision. It focuses on where God is taking the Church.” (Malphurs & Stroope; Money Matters in Church)
- “A church budget is simply the vision of the church for the next twelve months expressed in dollars, rather than words.” (Me)
I hope you spotted the same ones I did: mission and vision. A budget concerned only with controlling things and not including the vision and mission of the church, is not adequate.
