Here’s the second part of a three-part series. If you haven’t read the first part of this series please read it here.
Budgets work on assumptions, whereas financial statements work on actuals – what really happened to the money. Let’s look at some assumptions below that arise when ministries say they still have money in the budget but the organization doesn’t have any.
- Assumption #1 – revenue will come in as expected to fund the organization’s various ministries. What happens when the revenue doesn’t come in as expected? There is a direct correlation between revenue and expenses. In other words if you don’t have the money coming in, you can’t spend what you don’t have. 🙂
- The easiest way to explain this is using a personal household budget. Let say the household’s income (revenue) is $1200.00 per month and expenses are exactly $1200.00 per month. Let’s say a person doesn’t go to work one day during the month, so their income drops to $1150.00 but the expenses stay the same at $1200.00. At this point the household has to make a decision. Do they find a way to cut their expenses or pick up some extra work on the weekend to make up for the day they missed? Similarly, donations may decrease during the month, but ministries are expecting the full amount of money for their budgeted expense items. A decision must be made and some possibilities are the organization figures out how to get more donations coming in or cut a ministry’s budget.
- Assumption #2 – increasing revenue is easy so we can get the budget looking better. Most financial advisers say increasing revenue is the most difficult, when they discuss personal finances. I would venture to say the same is with organizations. Increasing revenue is hard as it takes time connecting with people, building trust, and so on – just like in personal finances waiting for that next job promotion or salary raise. The fastest and easiest way to stay on budget, is to cut expenses or reallocation of spending – ie. rob Peter to pay Paul.
- Assumption #3 – expenses increase/decrease like heat, food, and so on that wasn’t accounted for when the budget was made. In today’s society, inflation or deflation happens and there’s no escaping that. A prime example was just a few weeks ago gas dropped across the country from about $3.80/gallon to $1.90/gallon. There wasn’t one person that would’ve predicted the price deflation, let alone the hundreds of line items on a budget that the church tries to forecast each year. 🙂 Keep in mind that this example would have worked to the benefit of the church, but what would the church’s budget look like if gas sky rocketed to $6.00/gallon and stayed there for 1 – 2 years? In some cases this could mean financial ruins for a church.
Stay tuned for the last part in this series.