Budget Administration

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

Payroll Fraud

Our Fraud Awareness in the Church series continues as we look at Payroll FraudPSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent of fraud awareness in the church environment. We asked churches to respond to this statement:

“Each quarter we reconcile the total payroll amounts on the quarterly payroll reports (941s) to the total payroll amounts recorded in the payroll journal and general ledger.”

Survey Results – 75% of the churches reported performing this task.

I was surprised by the strength of these numbers.  In my experience, reconciling the quarterly 941 total wages with the salaries and wages reported in the church general ledger did not seem to be a common practice.  As a matter of fact, many times when our auditors would attempt to do this, the chore was almost impossible.

Why?  Because churches usually have a multitude of salary/wage general ledger accounts.  AND other expense items remotely connected to personnel issues are often “dumped” into the payroll line items.  I repeat, reconciling payroll is one of auditors’ most difficult tasks. Which makes my point.

KEY: Fraudsters prefer to hide in the tall weeds. (Big numbers)

Thieves try to hide their deeds in the big numbers, or accounts that have a great deal of activity.  The reason is simple: their actions will not stand out there.  The biggest of the big numbers for a church is PAYROLL.

KEY: You must know what is going on in your payroll accounts to avoid payroll fraud!

Budget Development – Scheduling

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. 

  • September

Establish a calendar to chart the process

Review the church mission, vision and strategy

Develop ministry goals for the coming year

  • October

Project expected revenues, fixed or ongoing costs

Determine available funds

Distribute budget request packets to ministers/laity/teams charged with budget responsibilities

  • November

Completed budget requests returned to the budget development team

Requests are reviewed/approved

Preliminary budget developed

  • December

Nothing!

  • January

Final analysis of budget

Adoption

  • February & March

Stewardship emphasis

  • April

Implementation

Cash Disbursements, part 5

Part 5 of our series on Cash Disbursements. In our recent Fraud Survey, we asked churches to respond to these statements:

“Our church issues credit cards (in the church’s name) to employees and/or volunteers.”

“Our church has implemented a written credit card policy to control credit card purchases.”

Survey Results – The first question had the largest variance between all respondents (58%) and respondents active in the NACBA (43%).  My assumption is that because NACBA members, through local chapter meetings, certification training, and the national conference, have heard plenty of the horror stories about credit cards “gone wild”.

It remains a mystery to me why churches handle credit cards in this manner (i.e. giving cards to ministers in the church’s name).  It is definitely not the practice in the business world.  Even if a corporation does issue corporate cards, the employee’s name is on the account too.  The employee pays the bill after being reimbursed under an accountable plan.  But if no backup is produced, or a personal expense is incurred, the employee pays the bill.

My worry that so many churches issue credit cards is somewhat alleviated by the results of the second question:  Of the churches that hand out credit cards, almost three fourths have a written credit card policy in place.

KEY: A word of warning.  The worst fraud investigation of my career was in the 7 figure range.  75% of the theft was accomplished with church issued credit cards. 

Budget Development – Step Five

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?)

Cash Disbursements, part 4

Part 4 of our series on Cash Disbursements. In our recent Fraud Survey, we asked churches to respond to this statement:

“Our church has established a “Positive Pay” program with our bank.”

Survey Results – Less than 5% of the respondents use such a program.

While the phrase “Positive Pay” is the trade name of one commercial bank, it has become a generic term for an agreement between a bank and its customer that works like this:

  1. The church establishes a standard routine for paying bills, for most churches once each week.
  2. A list of approved bills is compiled and transmitted to the bank.
  3. The bank only clears checks or other charges presented for payment that are on the church’s list.
  4. The church is also informed of any checks or charges presented for payment that were not included on the list.

Increasingly, businesses are using arrangements like this to address a newer face of economic fraud.  Fraud experts have historically used the “fraud triangle” of pressure, rationalization, and opportunity to describe the key ingredients of a fraudulent act.  Generally, this discussion has focused on “inside jobs”.

However, with the advance of technology, a new face has arrived on the scene – the “hacker” completely outside the organization (in many cases completely outside the country!).  Using Positive Pay is one protection against this type of fraud activity.

Perhaps a new leg needs to be added to the fraud triangle.  (I guess that would make it a square…)

Budget Development – Step Four

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.

Cash Disbursements, part 3

Part 3 of our series on Cash Disbursements. In our recent Fraud Survey, we asked churches to respond to this statement:

“Our church has established an “approved vendor” list.  All payments for goods or services are made only to vendors on the list.”

Survey Results – Only 20% of the churches surveyed reported using an approved vendor list.

The low compliance rate of this question was a big surprise to me.  The surprise was that so few churches have a formal process for determining who they choose to do business with.

In a previous post we discussed collusion.  One of the methods of theft, resulting in some of the largest dollar losses, is vendor fraud. Vendor fraud often occurs when a purchasing agent within an organization COLLUDES with a corrupt vendor outside of the organization.

What makes this type of fraud especially effective (from the fraudster’s point of view) is that it is extremely difficult to detect, by both the church and its auditors.

KEY: Fraud prevention includes KNOWING who you are doing business with.

Having a vendor application, approval and acceptance process helps the church apply this key.

Cash Disbursements, part 2

Part 2 of our series on Cash Disbursements. In our recent Fraud Survey, we asked churches to respond to this statement:

“Our church uses pre-printed, pre-numbered purchase orders or check request forms to initiate purchases.”

Survey results – The positive response to this question was extremely low, causing me to believe that the question was poorly worded.  It should have included the use of electronic purchase orders generated by most church management software.

Not being able to rely on the survey results, however, does not keep me from sharing the main point.

KEY: A documented approval and bill payment process is a must!

Keep in mind one of our previous posts: Fraudsters Hate Baselines. A well documented bill paying system forms a part of the baseline.

Budget Development – Step Three

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.

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