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.
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.)
A close cousin to ignoring the bank reconciliation is maintaining an excessive number of bank accounts.
Rather than using their church accounting software to take care of measuring and tracking restricted giving, some churches open separate bank accounts for each new special gift that may arise.
This results in a number of problems:
Burdens the accounting staff with extra work and contributes to the poor bank reconciliation management we discussed in the previous post.
Creates a great opportunity for a fraudster to play a very effective “shell game”. With multiple bank accounts and limited controls, an embezzler can shuffle funds among the accounts to create a dense smokescreen, making detection extremely difficult.
Key: The best practice is to gave as few bank accounts as possible coupled with strong internal controls and recordkeeping.
One of the more serious traps churches can fall into is poor bank reconciliation practices. Some of the ways we have seen this played out:
Due to understaffing and time pressures, bank accounts are not reconciled for months at a time.
Bank reconciliations are not complete consisting only of checking for cleared checks and surface level comparison of bank statement balance with the general ledger balance.
The bank reconciliation is prepared by the same person responsible for check writing, general ledger, reporting etc
There is no review of the bank reconciliation by supervisory personnel.
All of these things seem to take place because the church staff and volunteers have a poor understanding of the importance of the bank reconciliation. The bank reconciliation is the “Grand Central Station” of an organization’s financial activity. With the exception of a few, usually immaterial transactions, (such as petty cash disbursements) every transaction will flow though the bank accounts of a church. Performing the bank reconciliation on a timely basis helps insure the viability of a church’s financial reports. Additionally, having an independent reconciliation is one of the most effective fraud prevention measures.
KEY: Make sure your bank reconciliation tasks include:
A comparison of dates and deposit amounts with teller team reports
Investigation and documentation of transfers between bank accounts
Accounting for the sequence numbers of checks written.
Examination of cancelled checks for suspicious signatures, endorsements or other alterations.
Comparison of payees on cancelled checks with the approved vendor list.
Review of voided checks.
Many churches think that their state sales tax exemption applies to ALL TRANSACTIONS.
Unfortunately, this is not the case. An exemption from sales taxes only allows the church to avoid taxes on goods and services that it purchases in carrying out its mission. It does not apply to things that it might sell!
There is not necessarily a need to panic if you haven’t been collecting and remitting sales taxes. First, you simply need to educate yourself about how the sales tax process works and see if any of the many exemptions from the tax apply.
For example, in Texas, where I live, the list is long of possible exemptions:
Meal and food products sold at church functions. (Whew! Wednesday night suppers are safe!)
Annual banquets
Auctions, rummage sales and other fundraisers
One day sales
Membership dues
Publication fees if published and distributed by the church
These are just a few, and only apply in Texas. Although many of the states operate in a similar fashion, there are differences from state to state. If you are selling stuff, and haven’t thought about taxes, it may be time to give your tax professional a call.
Because of staff size many churches have poor segregation of tasks
Next to the absence of well-defined, written accounting and management policies, the most common weakness we have noticed in churches is the lack of adequate segregation of duties. In other words, the accounting tasks are not spread out among enough individuals. This is usually due to budget constraints, as churches tend to fund ministries first, then whatever is left is applied to administration. Whenever possible, accounting tasks, particularly those involving cash transactions, should be divided between several individuals to limit the possibility or even the appearance of the misuse of funds. There are two main purposes for developing a strong segregation of tasks:
First, strengthening the accounting control system protects the Church from the misuse of funds and loss of assets.
KEY: Second, proper segregation of duties protects Church staff and volunteers from unwarranted charges of impropriety. In my opinion, this is the most important reason for spreading the work around as many people as possible. We must never forget that in volunteer organizations, the appearance of improprieties can cause as much or more harm than actual occurrences of theft or embezzlement.
All churches should investigate ways to protect itself and its staff by finding methods to segregate as many of the accounting duties as possible. Here are some of the weaknesses we have seen in segregation of duties:
Often a church’s offering count teams are made up of the same individuals who perform the task week in and week out. Action Step: Make an effort to enlist as many people as possible to serve as tellers. Also, include a planned rotation of the counters
Many churches on Sunday mornings, store their offerings overnight in a safe that does not require dual access. Action Step: When money remains on Church premises for over twenty-four hours, use a safe that requires the participation of two individuals to unlock. (A less expensive way to do this is use lockable or tamperproof bank bags and assign separate custodianship of the bags and access to the safe)
By far the most common weakness is the habit many churches fall into of allowing the church financial secretary/bookkeeper to be involved in every aspect of the accounting process, particularly those involving cash. Action Step: The church bank account is the “Grand Central Station” of a church’s business activity. One of the most effective steps that can be taken to provide segregation of duties is to remove the bank reconciliation task from the bookkeeping department and assign the work to another employee or volunteer.
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.
