Before launching into a study of anything, I like to make sure I have at least a basic understanding of what the topic is all about. So, before launching into church budget development I looked up a few definitions of what a budget is:
- An accounting device used to plan and control resources of operational departments and divisions. (Warren, Survey of Accounting)
- A plan of financial operation consisting of an estimate of proposed expenditures for a given period and the proposed means of financing them. (Beams, Brozovsky & Shoulders, Advanced Accounting)
- A budget is one of the most effective internal controls… (ECFA, Accounting & Financial Reporting for Christian Ministries)
Re-reading these definitions I notice several key phrases:
– An accounting device
– Control resources
– A plan of financial operation
– An estimate of proposed expenditures
– Effective internal control
Are these definitions sufficient?
Our next series of posts will be a discussion of budget planning for the church. As I commented on our other blog (Faith Based Accounting: July 27, 2012) “Attitudes about budgets vary greatly among churches. Some churches operate without one, a practice I definitely do not recommend. Many others swing to the other extreme expending great amounts of time (and blood, sweat and tears…) creating a budget plan.”
In the next few weeks, we will try to share some insights that will help churches adequately plan and hopefully land somewhere in the middle of these two extremes. As you read these posts, you might want to consider this as somewhat of a book review because much of the material is based on Money Matters in the Church by Aubrey Malphurs and Steve Stroope. I highly recommend this book; it is one of the clearest and most concise discussions of church finances I have come across.
Our discussion will be grouped into four categories:
Definitions
Types of Budgets
Budget Development
Budget Administration
Churches have embraced the digital world and are becoming very proficient in the use of computers. A vast array of applications has been made available to the church including sophisticated financial accounting and reporting, childcare security, online purchasing, online tithing, phone trees and coffee bars with free wireless internet. Without a doubt, churches have become technologically savvy.
Unfortunately, there is a vast array of other things that most churches aren’t so savvy about: the numerous new portals computers provide through which fraudsters can gain entry into the church. Computer and online crime is drastically changing the face of fraud prevention. The best way to address this situation is to simply provide a list of questions each church should ask itself:
- Does our church have a formal Information Technology security plan?
- Do any individuals at our church have access to all modules of the church’s software system?
- Does our church partition its computer applications so that employees and volunteers have access only to files necessary to perform their duties?
- Does computer access require passwords that are confidential and unique?
- Are our passwords changed periodically?
- Are passwords complex including alpha, numeric and case sensitive characters?
- Do we have backup procedures that are performed regularly that include off-campus storage?
- Do we have measures in place to protect the church from malware?
- Do we train our employees to avoid accepting email from unknown locations?
- Do we have a download policy?
- Do we maintain separate public and private wireless networks?
(This post is part of an article published originally in the Spring 2011, NACBA Ledger.)
Not understanding intellectual property law can be a VERY EXPENSIVE TRAP! David Middlebrook defines intellectual property as “ownership of nonphysical property rights in creative thought or works that have basically been recorded or reduced to written form.” (Nonprofit Law for Religious Organizations; John Wiley & Sons, © 2008)
There are two types of intellectual property that a church needs to be aware of:
First, every church must be familiar with the intellectual property rights of creations by OTHERS. Examples include sheet music, video clips, song lyrics displayed on the screen during worship, and software licenses. The individuals and companies that created these things DESERVE TO BE PAID for their creations! Not adhering to copyright/trademark laws can result in some extreme financial penalties.
Second, every church must be aware of the rules regarding their OWN creations. This includes creations of church employees (including the senior pastor…) who create work in the course of their employment. Examples include music, videos/movies, books and software.
Not being attorneys we are reluctant to give much advice in this arena because intellectual property is more of a legal issue than tax and accounting.
Our advice is usually very short – “Seek legal counsel to help you determine your church’s compliance with these rather confusing laws.” (David Middlebrook’s Church Law Group would be a good place to get this help.)
Many churches fail to implement a well defined purchase approval and payment system
There is a great difference in attitude in the church environment between receipts and disbursements. While churches exercise extreme vigilance over the “inflow” of funds into the church, many have a rather cavalier attitude towards the “outflow”.
Churches also tend to rely on a few “fraud prevention” methods which in my opinion provide little more protection than a security blanket. They may give a warm and fuzzy feeling, but are no help in a real crisis. The two I hear most often are the requirement of dual signatures for checks over a predetermined amount and the requirement that a check request form be filled out before anyone gets paid. It is not uncommon for these to be the only two “fraud prevention” controls exercised over cash disbursements.
KEY: Churches that rely on methods this simple are unaware of two basic facts. First, dual signatures and homemade check requests are absolutely no match for an ethically challenged employee with the courage to forge. Second, and this may be the most surprising, many of the larger and more spectacular embezzlements involve tampering with the church’s cash outflow, not the inflow.
An important element of proper stewardship is to develop, implement and live by a well defined, written bill approval and payment process. Some key ingredients of such a plan:
A clear description of who will:
Approve bills
Receive goods
Validate invoice with purchase order and receiving documents
Prepare checks for payment
Sign checks
Mail bills
Record transactions in the general ledger
Use of pre-printed, sequentially numbered purchase orders, not check request forms that anyone can duplicate on a copy machine.
A vendor application and approval process culminating in an approved vendor list
Write checks and/or make drafts only to vendors on the list
Consider using a Positive Pay program in partnership with your bank.
It’s so difficult to say goodbye – firing right
Churches should follow prudent steps in firing employees. This begins by making sure that the termination must be for a legitimate, nondiscriminatory reason. Prior disciplinary measures must be consistent with church personnel processes and policies
The first step should be to schedule a meeting that includes the terminated employee, the employee’s supervisor, the church HR director or supervisor’s manager and the church’s legal counsel. (If considered necessary.)
First and foremost, the church should make it a goal to preserve the employee’s dignity. Keeping the meeting as brief as possible contributes to achievement of this goal. A concise explanation to the employee of the reasons for termination should be given along with a carefully documented history of the issues. That is why the performance reviews mentioned in our previous post are so important. Having a documented case history prevents the employee from asserting they were never informed.
KEY: Do not let the employee drag the process into an argument!
If severance pay is offered to the employee, discuss the terms of the severance with the employee. Church property including passwords, office equipment should be collected from the employee by providing the employee with choices of when he or she may pick up personal belongings.
Also, unused benefits, unpaid expense reimbursements, and written permission in regard to references should be addressed.
KEY: In some cases it may be better to deem the termination a resignation, especially in the absence of animosity. It is another way for preserving the employee’s dignity
Happy together; managing your employees
The best way to avoid mistakes in hiring and in firing is to employ simple, repeatable processes to help insure that the right things are done at the right time. One way to do this is to develop a “New Hire Packet” which should be given to each new employee. Some of the items that should be submitted to each employee are:
KEY: A copy of the official church employee manual
A form W-4 to be completed by the new employee
A form I-9 (Department of Labor requires all I-9s to be filed in a stand-alone file)
In addition to providing new hires with relevant forms, the church should maintain a separate file for each employee. Personnel files should be kept in a secure location and it is a good idea to store active and inactive personnel files in separate locations. Medical information must be kept in a separate file from the regular personnel files in order to be in compliance with the Americans with Disabilities Act. Other confidential information that should be kept separately includes the I-9, grievance and investigation records, and garnishments and loans to employees.
In addition, personnel files should include the original application form submitted by the employee, a signed W-4 and a copy of ministerial credentials for all employees hired to serve as ministers. (Ordination, licensing or commissioning certificate.) This is not mandatory, but rather a “best practice” insuring that church ministers are treated properly for income tax purposes. Paycheck deduction authorizations signed by the employee should also be retained and updated.
KEY: Finally, a record of performance reviews, evaluations and reprimands must be maintained on a current basis.
KEY: Many churches keep up with all of this paper work by using a personnel file checklist which assists in making sure all t’s are crossed and i’s dotted.
Getting off on the right foot – hiring right
One way to avoid unhappy situations is to begin on the right foot. And in personnel matters, that means hiring right. Churches should follow prudent steps in hiring their employees. For starters, a church must know what it is looking for in a new employee. That means that job descriptions should be prepared prior to the interviewing process.
Once that is done, a church can then begin recruiting and evaluating potential employees. Here are a few tips to guide churches in the recruiting process:
- Maintain a record, in writing, of all job openings.
- Keep a file of the various advertisements it has placed to recruit applicants.
- Utilize a standardized applicant screening and interviewing process, making sure that managers are properly trained in the conducting of effective and legal interviews.
- Utilize a standard application form which informs applicants of the terms and conditions of employment. (Particularly the right to consider their religious affiliation.)
- The application should avoid unlawful pre-employment inquiries. (Age, race, sex,. etc)
KEY: The application should be reviewed by the church’s legal counsel prior to being used in the hiring process.
The second trap, or thing to avoid, deals with payroll. Churches face risk in a variety of areas. Facilities, congregational unity, financial, security, and our next topic, personnel are just a few areas of danger.
In business terms, churches are in the “service industry” and as a result, typically, 50% of church budgets are dedicated to salaries and benefits. Personnel risk is significant. Operating in the personnel arena without a formal plan makes it even riskier.
Unfortunately, some churches do exactly that. Here is what has happened to some of those who chose not to manage personnel risk:
- Churches have been sued (and lost) after automobile accidents in which it was discovered the church assigned driver had a prior DWI.
- Churches have been sued after discovery of prior child abuse convictions of some of their employees.
- Churches have been victimized by embezzlers with prior convictions.
- Churches have been sued for unlawful terminations.
- Churches have been sued for sexual harassment.
In the next few posts, we will discuss things that should be done in order to avoid situations like these unfortunate churches. It’s important to point out that they were unfortunate primarily because they were careless.
Today we continue our discussion of the importance of long-range planning by looking at two other areas where churches need to be taking soundings, to see if storm clouds are on the horizon.
Ignoring long-range giving opportunities
At the present time, our society is going through the greatest asset transfer in world history. Many of the baby-boomers, who have lived through the most prosperous eras of our nation’s history, are reaching retirement age. With ever increasing amounts of disposable income many are also looking for worthy charities to share their abundance with.
Many pastors are surprised when they read in the newspaper or online that one of their members has given a substantial endowment gift to the local university or hospital. Some pastors screw up the courage to ask why the church was not the beneficiary only to hear the following comment. “You never asked.”
Whether churches like it or not, they live in a competitive arena. Various organizations within the nonprofit sector are vying for a limited amount of donor dollars. Churches also need to realize that secular charities are asking their members for significant gifts. Maybe the churches should too…
When it comes to fund-raising, few churches look past current budget needs or an occasional building campaign. Very few venture into the planned giving arena. Perhaps it is time to begin.
Failure to address demographic change in the church’s mission field
In the last few decades, immigration has drastically changed the demographic makeup of our nation. In the course this major shift, neighborhoods have taken on a new look and culture. Unfortunately, many churches failed to adapt to their surroundings, and as a result, have seen a dramatic decline in membership. In fact, many have ceased to exist.
Because most of these churches are in older parts of most cities and towns many church leaders in the growing areas feel somewhat immune to this situation. I think this is a false sense of security. I am getting old enough now to have seen quite a bit in my career providing services to churches. One thing I have noticed is that churches do indeed have a cycle they follow. Eventually, the new becomes old and almost all churches must re-evaluate their situations. It is essential, to be an effective ministry present, each church must evaluate its calling. One way to do that is to have a firm understanding of its surrounding neighborhoods. By paying timely attention to these matters, churches can adapt their efforts and provide ministry to their new neighbors.
