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.


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?

Budget Planning

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:


            Types of Budgets

            Budget Development

            Budget Administration

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 5)

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.

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.

Trap #8 Violating basic accounting rules and practices (Part 2)

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.  But that is only the start.  After all of the effort is expended, they then protect their “sacrosanct” budget with all of the additional energy they can muster.  More times than I can count, I have seen this attitude cause a church to slip into our next trap.

Trouble comes when a church that considers its budget as carved in stone is faced with an unexpected (unbudgeted) expense.  These churches find themselves on the horns of a dilemma…

The first reaction is to not pay the bill or postpone the services simply because “it’s not in the budget…”  I cannot tell you how many times, churches in dire need of our services postponed the work until the next budget year even though they were flush with cash.

But often, the expense simply cannot be postponed.  (For example, an air-conditioner malfunction, in mid-August, in Texas with 100+ degree temperature.)   What do they do???

Once again, because the budget is written in stone, they dare not charge the expense to a budget line item.  So they “dump” this expenditure in the next best thing, one of their equity accounts.  The technical title according to accounting principles is “Net Assets” but we have seen equity accounts called by many names including “Fund Balance” and “Retained Earnings”.  We even had one church set up a special fund for unexpected expenses and called it the “Dump Fund”! 

Too much of this “dumping” will render a church’s financial statements meaningless.  The purpose of the Statement of Activities (Income Statement) of a church is to reflect how much money was received and how much money was expended, regardless of what our budget planning had hoped for…  I haven’t checked the Bible closely about this but I don’t think having a negative budget variance is an automatic sin.

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