- Assumption #4 – we can use last years numbers and just increase/decrease them a little, commonly called an incremental budget. The interesting thing is that many churches do this type of budget. While itmay be true that some line items will remain the same or very close, themajority will not. The leadership, as with anyone, probably aren’t fortune tellers that can look into the future of the budget line items.
- Zero Based Budget Line method – This is why each budget line item should be scrutinized using past figures (actuals and budgeted), market analysis, mission focus, justification, and so on. This method is called the Zero Based Budget Line method. In other words, before budgeting the monies a ministry may need, the ministry brings their justification to the board for the money they seek. Each budget line item starts at zero until there’s an appropriate justification. The time spent is good to review the effectiveness of each ministry expenditures and ensure nothing is overlooked.
- Assumption #5 – the actuals must match the budget. As much as we want things to match in a council meeting, the budget numbers (a forecast into the future) will hardly ever match the actual (real life transactions) exactly. Aside from some of the more stable monthly bills (ie mortgage), the amounts for the actuals and budget numbers should be close but they will hardly be the same. When this is the case the church’s leadership should be making decisions on how to best address the fluctuation. Could it be that the church underestimated (expenses) or overestimated (revenue) the budgeted line item? Was it because an accounting error which affects the actuals, or the budget was initially entered incorrectly? Did the church actually spend that much money on the budgeted line item? If so then your budget is wrong not the accounting transaction. These are all questions that should be answered and a final decision by church leadership.
Which ever assumption listed above or others not mentioned, there’s one indisputable truth with church budgets:
‘A church’s budget numbers don’t dictate that the ministry has the money to spend!’
So what tells the individual ministries what they can spend? The FASB reports as they indicate the actual money that came into the organization for the month (Statement of Financial Activities), at which time the organization can make the decision(s) of how much can be spent, if anything. Additionally, the Statement of Financial Position tells the organization how much money they have currently not spent.
One last analogy comparing budgets to audited FASB complaint reports. The FASB reports are like the accurate gauges in the car’s dashboard with true readings and the trip planning is like the budget. You plan a trip and pull up to a full service gas station for a full tank of gas. Your trip plan uses one tank of gas. Unbeknownst to you the gas station attendant only puts in a half tank of gas and you drive away not checking your accurate gas gauge. After arriving at your destination the car’s gas gauge has a quarter of a tank of gas when it should have three quarters — according to your trip’s planning. Why? There’s all kinds of things that could have happened – gas attendant short changed the gas as in this case, fuel leak, the gas cap was loose, and so on. These happenstances sound a lot like real life in an organization reacting to revenue (gas in this case) shortages to cover the budgeted item. What should you have been looking at all this time? — The accurate gas gauge before leaving the gas station. The accurate gas gauge is just like the FASB complaint reports mentioned earlier as they tell the organization where they stand financially — independent of created budget numbers. The budget is only a tool whereas the FASB reports have factual transactions to back them up.
While budget reports are great tools, organizations should understand their numerous limitations and by the same token spend more time understanding the true financial reports, mentioned earlier, so organizations can make wise decisions on how to spend their money. A system like IconCMO can budget on every fund and copy budgets from one year to the next using the budget numbers or the actual numbers. This gives the church a good budget starting pointing. Keep in mind that the FASB reports are always more important as budget reports are inconclusive.