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.

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.

Budget Development – Step Two

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.

Budget Development – Step One

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!

Types of Budgets

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.

Budgeting Defined (Part 2)

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. 

Budgeting Defined

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?

Trap #10 Taking Information technology for granted

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.)

Trap #8 Violating basic accounting rules and practices (Part 6)

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.

Trap #8 Violating basic accounting rules and practices (Part 4)

Another practice of many churches plays right into one of a fraudster’s strengths, the ability to withhold information.  Perhaps in an attempt to avoid interminably long finance committee meetings brought on by micro-managing members, or more likely, fearful that the messenger is going be killed, some church administrators tend to hold back on the financial facts. Failure to present full-disclosure financial statements is the most common way of holding back information. 

Instead of traditional financial statements, a church may elect to present summary information in an attempt to control the facts.  Making matters worse, they may also use electronic spreadsheets to do the work.  Although spreadsheets are very powerful and useful, they have one major flaw: the preparer is in total control over what goes into the report.  There are no balancing requirements as with a normal set of financial statements based on a double-entry accounting system.  Some crooks have one word to describe this situation. Disneyland!

Financial statements are simply another form of communication used to convey the financial situation of the church.  Their goal, in the church environment, is to answer a few basic questions.  How much cash do we have on hand?  Is any of it restricted?  What kind of assets do we own?  Who and how much do we owe?  How did we do this year?  Did we stay within budget?

To answer all of these questions adequately, a church must present a full set of financial statements.  This includes at a minimum, both a balance sheet and an income statement.  (These are business terms; the corresponding non-profit titles are statement of financial position and statement of activities, respectively.)  In addition, if a church has a high volume of restricted activity, a separate schedule of restricted gift activity should also be presented. 

Not only does “summary reporting” result in an uninformed church.  It can also result in a victimized church.  A church with a history of being satisfied with summary reports combined with poor personnel decision-making may end up with an embezzler having the best of both worlds; being able to take what he wants from the church and covering up the evidence with his own reporting system.

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