Monthly cash receipts seldom match what was budgeted and it is not unusual that during some months, cash outflow will exceed inflow. (Like July and August…)
Not preparing for this may force a church to:
One way to avoid having to resort to these measures is using a monthly cash budget. This is a fairly simple process of developing a “budget within a budget”. Using historical data:
Even though we started with keeping an eye on receipts, most of the budget busts I have seen have been in this area. Stories are legendary about ministers with little regard to the budget process and some of the budget bypassing techniques they employ can be quite creative. Many of these situations I have helped churches work through if the church has simply understood this: A formal bill paying and approval system is a must!
A strong bill-paying system must clearly document:
Tithes and offerings are the financial life-blood of a church. Changes in the flow of a church’s resource stream need to be regularly monitored. This is not something that is only to be done during the budget development process. By waiting until then, it may be too late. By keeping an eye on receipts, churches can move quickly to address shortfalls.
First thing is to make sure you are identifying all kinds of revenues such as:
Once this has been done the goal is to be on the alert for trends. The earlier a church spots a new trend in giving, the easier it is for making mid-course corrections. Just like driving a car, it is much safer to ease over into the next lane than jerking suddenly on the steering wheel!
Here are a few questions a church should ask in order to identify trends:
A strong platform for managing the church budget begins with the chart of accounts. For any non-accountants reading this, a chart of accounts is simply a list of the church’s general ledger accounts used to generate financial statements. The accounts are listed according to where they appear in the church’s financial statements beginning with the balance sheet and running through the income statement. The accounts as they appear in the church’s income statement should be an exact replica of the church budget. Frequently this can be a problem with churches using financial software designed for businesses. Because the financial statements generated by the software system look like a business, the church will resort to spread sheets to develop a budget. Unfortunately, this makes mid-stream budget analysis difficult.
A financial reporting system that keeps the church truly informed is the next requirement. A church should generate timely financial statements (usually monthly) that generate not only results of activities but also a meaningful budget vs. actual comparison. To be meaningful, the budget must be broken down by month but NOT simply by dividing the annual budget into 12 equal amounts. Annualize the budget by incorporating the natural trends in all accounting years. (For example, receipts will be much higher in December than July…) Also, hardly anyone does this but try to include designated/restricted gift activity in reports. It’s perfectly permissible to budget for these types of gifts.
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:
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.
Establish a calendar to chart the process
Review the church mission, vision and strategy
Develop ministry goals for the coming year
Project expected revenues, fixed or ongoing costs
Determine available funds
Distribute budget request packets to ministers/laity/teams charged with budget responsibilities
Completed budget requests returned to the budget development team
Requests are reviewed/approved
Preliminary budget developed
Nothing!
Final analysis of budget
Adoption
Stewardship emphasis
Implementation
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.
A few of the questions that need to be addressed during this process are:
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:
One other suggestion regarding allocation of funds. It is not a bad idea to leave room in the budget to build cash reserves for two good reasons:
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: