Budgeting and forecasting involve strategically looking ahead and anticipating ministry expenses. Even expert financial analysts will not detail out every possible scenario for a given year. However, you should include all of your expected expenses. Plus, you should have some margin in place for unexpected expenses or have retained earnings set aside for emergencies. You also need to have some type of system or governance structure that restricts the use of these funds for times of emergency.
Replacing the parking lot is an expected expense and should be planned for. However, there are times that flexibility is needed for a crisis or major unexpected opportunit. Below is one example of wise stewardship in the face of a crisis. On October 9, 2017, my family was living in Santa Rosa, California when we were unexpectedly evacuated due to the Tubbs Fire. Thinking we had lost everything, we headed to our church, New Life Christian Fellowship, in the middle of the night. As news broke of the devastation, church leadership immediately set up a shelter that operated 24 hours for over a week. I am not sure of the actual cost, but the real costs were probably tens of thousands of dollars for the church. We will forever be grateful for their flexibility and love.
Your role in the church budgeting process may be more as a visionary leader, than an actual accountant. As a reminder, mishandling your churches finances can jeopardize your 501(c)3 non-profit status, or even worse, damage your ministry’s reputation. To help deepen your understanding, Zondervan produces an annual Tax and Financial Guide specifically for churches.
Starting with Why
Your ministry may be unique, but the business practices do not need to be complicated. You must be able to communicate your unique purpose in order for others to support you in forecasting. Identifying the portion of your budget that will be directly tied to ministry is a great place to start.
Starting with the end in mind will help align your budgeting decisions.
Your church’s expenses will fall into two main categories: fixed expenses or variable expenses. Fixed expenses are routine costs that are of similar amount, such as a building mortgage. Insurance, payroll, and many ministry expenses are fixed expenses which can be easily budgeted by looking at the previous years’ expenses and current trends.
Variable expenses will change each year, or even month, based on fluctuating needs. If your church took 40 youth to camp last year and expects to take 80 youth this year, your budget must be adjusted for the additional expense. Variables expenses will change as your ministry grows or shifts strategy.
Many ministries simply “cut and paste” last year’s numbers into a new budget. This method usually does not account for the fluid and changing nature of growing ministries. Instead, the best approach when planning next year’s budget is to use a tiered system. We recommend breaking your expenses into three tiers.
Tier 1 includes mission critical expenses, such as payroll and mortgage commitments.
Tier 2 is anticipated activities for a normal year, including facility maintenance and office supplies.
Tier 3 captures the realistic dream list for the next 12 months, which may include building renovations or adding part-time staff.
If you present your budget for approval, include all Tier 1 and Tier 2 numbers to form the actual budget. Not every department needs to include Tier 3 dreams, but both variable and fixed expenses should be included in Tiers 1 and 2. My recommendation is to have a tangible difference between each tier. A $20 white board probably does not need to be included as a dream, but a new sound system may be something you are praying and planning for in the upcoming year.
As giving trends fluctuate it should trigger a move from one tier to another. If giving in the second quarter increases by 20%, you may decide to shift to your Tier 3 wish list. When donor gifts are less frequent than previous years, you may be forced to cut back to mission critical expenses (Tier 1).
When to Budget
I recommend church leadership set aside at least one hour per month to review the church’s financial position. Ask for monthly financial statements and make notes that will be beneficial during the budgeting season. Did you have a large, unexpected gift? You may not want to include this when planning next year’s donations. This is also a great time to dream about the future.
During the annual budgeting season, pull out your notes each month and review trends. The process will be smooth and you will be able to effectively communicate the why behind your first draft.
I want to encourage you not to overcomplicate the budgeting process. If you have never prepared a budget, this may not be the time to go to a three tiered system. There are a lot of great tools online that can help formulate a plan. Ask questions so you can faithfully steward your talents. Please reach out to me personally at www.talantonservices.com if you have additional questions regarding budget preparation.