Church finance: the business basics
Ministry and church leaders wear many hats as they seek to fulfill their calling. This article is designed to assist pastors and church leaders as they navigate the financial aspects of ministry by providing a basic foundation of business principles. The knowledge and application of these principles will help strengthen the financial integrity of any ministry. Stay tuned for additional articles on managing ministry financials.
Pastoral ministry is a calling that requires all types of skills. Pastors are called to teach, preach, shepherd, counsel, cast vision, and lead in a number of ways. One aspect of pastoral ministry that does not get a lot of press is the business part behind the public ministry. Let’s face it, pastors wear a lot of hats. Pastors don’t have to be business experts or have advanced degrees in accounting to lead well. However, a basic foundation of business principles can help pastors lead their ministries in ways that honor God. Plus, a little basic knowledge will help pastors avoid some common mistakes.
Pastors are called to lead the church in a way that is above reproach (Titus 1:7). This means that we are to lead our ministries with an extremely high degree of integrity. Honesty, transparency, and integrity honor God and provide a good witness to the world. I can think of several examples where poor stewardship and bad business deals resulted in big trouble for ministries. Even unintentional errors can have lasting consequences. Mishandling finances can damage your public perception, jeopardize your 501(c)3 non-profit status, and pull significant money out of your ministry. Leaders must have a clear plan in order to properly steward church finances.
In this post, we will discuss some basic financial terms and principles that every pastor needs to know. I’ll expand on this foundation in future posts. Knowledge of basic business terminology and concepts is one of the first steps to lead well in this area.
Income vs Expenses
Income is generated throughout your ministry. As a working definition, church “income” is any money or asset that is received by the church. In the business world, income may also be called “top line sales” or revenue.
General giving through a weekly offering will make up the majority of church income. However, the church’s income may also include the sale of merchandise, tuition from a daycare or school, or rental income from other organizations. Income must be accounted for in a few different buckets. There may be tax implications for each type of gift. Do not shy away from these alternate or non-traditional revenue streams. However, do your homework or consult a CPA in your state before accepting a new source of income.
Expenses are the monies used to operate the church and ministry. Typical expenses within the church include staff salaries and benefits, office purchases, property insurance, building mortgages and utilities, janitorial supplies, and any other dollars directly related to ministry, such as benevolence.
Income is the total money coming into the church. Expenses are payments going out of the church.
Profit or Retained Earnings
Profit does not have to be a dirty word. Profit can be a sign of a healthy, growing organization. You may also hear lay leaders refer to profit as net income or “bottom-line” earnings. Rather than profit, a more appropriate word to use in church settings is “retained earnings.” Retained earnings is simply where more income was taken in than expenses that went out. The church may take in $50,000 in one month, but expenses were only $40,000, resulting in retained earnings of $10,000.
There are valid, strategic reasons for operating at a loss of retained earnings. The church may be investing in the next generation by hiring a Youth Minister before it makes cents (I love puns) or reinvesting in the facilities by upgrading lighting in the worship center. Unless the church happens to be located in Silicon Valley, no organization is effectively managing their finances at a loss over a significant period of time.
Retained earnings will help the church continue through an unexpected expense. If retained earnings are more than you feel comfortable with, the church can increase its investment in the community or a neighboring church. I promise they will appreciate the generosity!
Budgeting and Forecasting
Budgeting is the process of looking ahead and planning income, expenses, and retained earnings. Budgeting is more than just crunching numbers, it is a strategic plan of allocating resources to accomplish future plans. During the budgeting process, it can be a great time to evaluate what has worked in the past and plan for new mission objectives. During budgeting season, church staff will benefit from weekly time set aside to review their budgets. A church that I respect, has their budget lined out in three tiers. Tier 1 is mission critical. Tier 2 is anticipated activities. Tier 3 is a wish list. This allows for non-emotional decisions if income is ahead or behind the initial plan.
Forecasting is more number crunching, technical work. Although forecasting may simply be codifying the annual budget, it can also be used throughout the year to make adjustments in a shorter period of time. Publicly traded companies will utilize forecasting to paint a more accurate picture of their finances for a specific three months, or fiscal quarter. Having expertise will increase the accuracy and excellence of your church’s forecast. Anyone who can plan their personal finances can create a financial forecast. Plan on spending at least a full day during budget kickoff and a half day to solidify your forecast before your new financial year starts. The amount of time you will need may change due to the complexity and size of your church.
Do not budget or forecast under a time crunch. Human nature will lead most people to take shortcuts.
I’ll discuss additional practical steps that you can use to lead with financial integrity in future posts. Don’t be afraid to seek out help when it comes to the business aspects of ministry. For additional ways to increase facility stewardship, check out ECFA.org.
To find out how Talanton Church Services can assist your church, please visit http://talantonservices.com/.