Managing Church Finances – The Right Way

This post was last updated on November 22nd, 2021 at 02:47 pm.

Managing Church Finances Is More Than Budgeting

A quick search for ‘managing church finances’ will give you a lot of information on creating a budget and following it. Budgets are important of course, but it’s crucial that churches don’t place too much emphasis on this tool. Budgets often roll forward each year, rarely changing unless there is a large discrepancy for one of the accounts.

What is the wrong way to use a budget? Generating a budget using last year’s numbers and then only reviewing it prior to the current accounting period ending. What’s the typical result when reviewing the budget towards the end of the year? Most of the time the church:

• is shocked because actual revenues don’t come in as expected.
• overspent in certain areas and didn’t adjust throughout the year, thus the church’s target budget is missed.
• copied the budget from one year to the next instead of looking at the actuals from the current year to determine if any major changes need to be made to the budget.

The Budget’s Rub

Here’s the rub when looking at the budget towards the end of the year. It’s too late to do anything about it except maybe pray for a miracle when things look bad. This is one of many shortfalls when the only tool used from year to year is budgeting. Another shortfall is that the outlook for a budget is only 12 months, then a new budget is started. Budgets are powerless for any organization that wants a longer financial outlook. These longer financial outlooks are what keeps church doors open in the foreseeable future.

Financial Planning

Here’s a quote that better explains financial planning.

Planning is bringing the future into the present so that you can do something about it now.

Alan Lakein. American author.

A budget is a short-term goal, whereas financial planning is a short, medium, and long-term plan with goals that are set at each interval. Churches use a budget as a tool to accomplish their short, medium, and long-term goals within the financial plan. So what does financial planning take into account that budgets ignore or have a hard time planning for?

• replacement of capital investments
• mission longevity
• church growth
• investments for growth
• and a lot more…

Capital Investments

How do churches handle capital investments like new roofs, parking lots, building expansions, and so on? It’s important these investments are not an afterthought because the update is hastily completed due to system failure. – i.e. a roof leak or HVAC system goes out. Typically, these expensive investments aren’t a priority until something happens such as a leaking roof. Is the best way to plan for a big expense to wait until something happens like a roof leak? Probably not.

Avoid last minute capital campaigns.

Has your church ever started a last-minute Capital Campaign? These last-minute campaigns for roofs, windows, parking lots, and so on can be avoided in most cases. How? There are two things that have to happen. 1.) The church needs to inventory the building systems to determine each system’s useful life. The useful life is a good indicator of how long a system will last before costly repairs become an issue or a new system is needed. 2.) Then, financially plan for each system based on the useful life timeline. By setting money aside for each system in the yearly budget, they avoid last-minute capital campaigns.

Building Systems definition — the mechanical, gas, electrical, sanitary, heating, AC, elevator, plumbing, life-safety, and other service systems of the building.

How does the church figure out the useful life of the various building systems?

In the majority of the cases, a contractor can estimate how long something will last. The contractor will take into account the building system’s quality, installation, present wear and tear, the current age of each system, and other factors. In an older church building, the contractor can tell you how much longer the windows or roof may last.

Helpful hint: If the church is buying a building, it’s good to have a contractor assess the building systems. The assessment should be completed before you put in a purchase offer. This gives the organization an idea of what big-ticket items may come up in the first 1 – 3 years of ownership. Owning a building is more than just paying the monthly mortgage and thinking that the building will take care of itself for the next 20 years.

Mission Longevity

Let’s first define what we mean by ‘mission longevity’ for this post. Churches do various types of missions, like disaster relief, social justice, food pantry, foreign country missions, and so on. When planning for these missions here are a few questions to ask from a financial planning perspective.

• How long do we plan on supporting this mission (i.e. 2, 5, 10+ years)?
• Can we currently afford this mission in the good and bad times?
• How many missions are we currently supporting right now?
• Are we shutting down another mission to start this one?
• Will there be enough resources to support another mission?
• Does the mission have to increase funding each year to stay ahead?

Failing to plan

Another quote comes to mind from John Beckley that sums up what is at stake with mission financial planning and that it shouldn’t be short-term or short-sighted.

Most people don’t plan to fail, they fail to plan.

John Beckley.

As you can see these questions take a little more planning than just adding something to a budget. The church leadership should decide which questions are important for each mission. The answers should be detailed in hard copy form. Why? It helps future church leaders as they can refer to the information at a later date. How can this information help leaders?

• helps future leaders understand why the mission was started
• helps future leaders understand why the church thought it was important at the time
• help future leaders understand how it was budgeted for initially

The church doesn’t want to rely on people’s memories or hearsay to understand the financial plan that started five years ago, after multiple leadership changes.

Church Growth

Preparing for church growth takes a considerable amount of financial planning to avoid disaster. How will the church handle growth year over year or month to month? Is there enough room to seat everyone? Do we need more room? Does the church need to have two services because of high attendance? If the church goes to two services, do we have the manpower via staff and volunteers? What about volunteer burnout?

Having an increase in church growth is awesome, but requires preparation. A new church will have different challenges than an established church. Since every organization is different, their church growth planning will be different. Things that can make a financial plan different include the church’s history, length of time as a church, resources, staffing, volunteer network, and so on. All of these church traits create a financial plan that will be vastly different from one church to the next.

Why Budgets Aren’t Useful For Church Growth

Church growth can’t be examined as a budget line item because at best it only looks at 12 months at a time. Church growth doesn’t stop at the end of the budget period. By the time the ‘budget talks’ come up towards the end of the current budget period, it’s too late to make the changes that are needed. A financial plan takes into account a long-term approach and is a much better tool to use. It not only measures church growth but prepares for it.

Budgeting vs. Financial Planning

What are the major differences between budgets and financial planning? Let’s look at budgets first since they are the most understood tools by churches. Budgets are typically looked at towards the end of the fiscal year when they are ready to make the new year’s budget. In most cases, the budget is not discussed in any meaningful form at monthly meetings or even updated throughout the year.

Let’s talk budgets

Church budgets are reviewed in depth towards the end of the fiscal year when the church is getting the next year’s budget ready. However, this timing is typically too late to do anything about the current budget when there are multiple expense lines that are either overspent or underperforming revenues.

For example, how do you address an overage that happened in February when the in-depth review happens in November’s budget meeting? It’s a little late by November to do anything about an overage. The only thing the church can do in November is to allocate more for next year’s budget and hope they can cover the overage this year. In other words, by November the church can’t typically move budget lines around much to try to compensate for the spending overages or shortfall revenues.

The main deficiency in budgets is that they only look at the revenue and expenses by the year and are updated, rarely. Budgets have no long-term goals set by the organization past the 12-month time frame. An organization’s financial health is determined by long-term planning which is more than 12 months. The tools- like budgets, that churches use fundamentally, fail the organization because they simply are the wrong tool to do what the church needs which is financial planning for long-term financial health.

Let’s talk financial planning

Financial planning has three parts. First, the organization must determine where they stand financially, then create financial goals, lastly, they need to create a plan to reach these goals. If organizations actually follow these steps, it’s highly unlikely they will fail financially. To reiterate the three parts are:

• understanding the current financial position
• creating financial goals
• creating a plan to reach those goals

Now let’s talk about how financial planning helps. It certainly goes hand in hand with budgets, as budgets (and debt payoffs) are one of its components. But, financial planning also takes into account — investment strategies, staffing logistics, long-term property endeavors and/or capital investments, and much more. Notice that budgets are a very small piece of the overall financial plan. Churches spend an enormous amount of their time on budgets as they prepare for the next year. However, discussions on investments, market stocks, or capital investments such as repairing the building are rarely discussed throughout the year or even at the end of the year during the budget meeting.

When budgets are the primary focus during the annual financial meeting, long-term planning may be neglected. It may even point to a larger problem. It’s possible that churches ignore the full picture of financial planning because they don’t understand the importance of it.

Quick Review of Budgeting vs. Financial Planning

As we can see, comparing budgeting to financial planning is vastly different. One uses a short-term outlook and the other takes a long-term view. At the same time, one is just a tool and the other takes into account many other facets that give the organization a more complete picture. We also discussed the importance of not spending the entire annual financial meeting on the budget and little to no time on financial planning.

So, What’s The Right Way To Manage Church Finances?

The first thing to recognize, is that finances must be talked about more often than a couple of times a year and at a more robust level. In other words, managing church finances doesn’t start and end at the budget as many churches believe. Let’s review other areas that churches need to be aware of and focus on.

Debt Management

Managing church finances will involve debt management at some point. It could be a small balance on a credit card or a million-dollar church expansion. Either way, when debt isn’t managed well, it usually means trouble. Debt management should be included in any budget discussion to see how it can possibly be lowered faster or at least know if the church is on track with paying it off.

Debt management – two important points

Point # 1: The church needs to define the organization’s guiding principles when it comes to debt.

Church board members or leadership need to openly discuss how debt should be managed. Once the organization agrees, guidelines should be created for the organization to successfully fulfill these goals. There’s a lot of strong opinions in the religious arena when it comes to debts owed and why a guiding principle should be agreed upon, however that’s not the part we want to address.

Point # 2: The guiding principle from point #1 is what the church follows and also teaches from the pulpit.

The other point we want to go over is, the church probably wants to avoid being hypocritical from the pulpit by telling their church members something contradictory to the organization’s own debt guiding principle. What the church could do is be upfront and show the church members how the church plans on paying debt off. This communication goes a long way with church members that are looking for advice and inspiration for debt management. In other words, be an example for the church members and not preach that all debt is bad if the church is sitting on a mountain of debt themselves.

Emergency Fund

Having an emergency fund is the cornerstone of any personal or household financial plan because it keeps families from going into debt over and over. Most personal financial coaches will tell families to have at least 1 – 2K for an emergency fund. Why? Because most of the time anything major that happens in a house, will cost between $1,000 – $2,000. This amount unfortunately isn’t enough to cover major problems in a church.

For churches, they have to decide on how much they should have in the emergency fund. A good rule of thumb to start is- 10% of your budget should be dedicated to your cash reserves. Additionally, the emergency fund should take into account the church building and how expensive certain repairs may cost like a roof, furnace, or other large ticket items. Once you have a good amount in cash reserves there are investment strategies like laddering, that can grow this money quicker and faster which should be explored.

What if you don’t have a building yet? The church should still have funds set aside for other reasons such as non-renewal of a lease for the space they are currently using. Or maybe a missionary they are supporting needs a quick cash infusion for some reason? Every organization will be different in what they assess this value to be. What’s more important to note, is its better to have money in the bank to use for emergencies, than asking for it in the time of need. A quote comes to mind when it comes to money in the bank.

A bird in the hand is worth two in the bush.

No definitive originator but is an old English proverb.

Budgets Don’t Typically Include Money Set Aside For The Emergency Fund

Every annual budget should include money for the emergency fund. When a current budget doesn’t set aside money for emergencies, the budget is short sighted and may fail the organization. In other words, the budget should not just cover expenses. The reason the budget would fail when emergency funds aren’t included in budgets is when something major happens, the church has no extra resources to take care of it, except using a loan. Emergency funds keep organizations from closing their doors.

Built In Safety Margin

The ‘built in safety margin’ sounds similar to an emergency fund, but its vastly different. Building a safety margin means to have a budget with total expenses less than forecasted revenue. There’s a “safety margin” between the revenue and expenses. For example, if the church thinks they will bring in $500,000 for the year, the church shouldn’t budget their expenses right up to the $500,000. Instead budget expenses to about $480,000 giving a $20,000 safety margin.

What are the benefits to building in a safety margin? The benefits are at least two fold. The first benefit is if revenue comes in a little less, there’s a built in cushion. So if the church only brings in $490,000 missing the $500,000 estimation, it’s okay since your expenses are set at 480,000 well below the $490,000. The second benefit is if the revenue comes in as high as expected, that means there’s more money. This money can address immediate needs if needed. A better use is to tuck it away in the emergency fund to use it when needed — i.e. a sudden crisis.

Church Board Financial Literacy

One of the best ways to help any organization survive financial challenges, plan for the future, and be good stewards of the church’s resources is to become financially literate. Through more than three decades of working with organizations and looking back at my own education, I’m in disbelief that basic financial literacy wasn’t discussed in school or college. Luckily in today’s society we have all kinds of platforms that can teach you these very valuable financial literacy lessons.

What can the church board do to help their organization? There are two solutions we will go over. If the organization has one or two people that are financially literate, count your blessings. This makes the church’s life a lot of easier thus the church board should not only listen to these financial literate people, but learn from them and ask a lot of questions.

The other solution takes a little more time. The church board members need to take the time to educate themselves on financial matters. This can take many forms such as reading books, taking part in financial podcast, attending online classes, or any other means to understand financial literacy. Financial literacy is not the same as having a CPA or a Financial Advisor certificate. One way to find people that are financially literate is successful entrepreneurs who have multiple businesses. Some things that financial literacy teaches that most people don’t understand are:

• mortgage points
• prioritizing which debts to payoff
• planning for future using insurance as a risk-mitigation tool
• understanding credit scores
• choosing the right investment products
• calculating the debt to income ration for the organization
• maintaining and purchasing fixed assets
• and more

Forecasting Revenue

In the case of forecasting revenues for churches this takes the form of donations. How do churches typically forecast revenue? Most of the time, the church board in November will look at the received revenue and take a guess on how much more will come in by the end of the year. Then they increase this approximate total by some percentage — say 5 – 10% assuming that people will give more in the following year. What’s wrong with this plan?

The church is making a revenue forecast based on two guesses!

The guessing game

The First Guess

The church board is first guessing how much money may still come in by the end of the year — i.e. for November and December. We will call this the “estimated amount”. Keep in mind budget forecasts are created a couple months before the end of the year. This time frame keeps the organization from knowing the grand total of donations. As most churches will tell you, December is notoriously hard to predict income revenue. Why? Because December is when they receive large amounts of year-end donations that are atypical to other months. The skeptical person would say that churches could over or under estimate the year-end received donation amount. It fluctuates so widely that the estimates are rarely right.

Note: Guess #1 is that the incoming revenue for the church is an estimate because of the timing when budgets are created.

The Second Guess

The second guess is based on this “estimated amount” for the revenue. Then, to figure out next year’s projected revenue increase, the organization uses some outdated percentage like a 5% increase to donations year over year. If there’s no data to back up this 5% assumption, then its just a guess. The hard truth about estimations based on guesses, is that if the assumption is off by 1 – 2%, it will throw off the revenue forecast by a lot. We will see this in the upcoming guessing game example.

Note: Guess #2 is that the organization uses an outdated percentage to increase the forecasted revenue and base it on the estimate amount (i.e. guess #1).

The guessing game example

Let’s look at a simplified example using a guess of $500,000.00 for the total revenue.

Next let’s look at two different amounts that the revenue increases using two percentages like — 6% and 8%. Keep in mind the church is guessing on these percentages without adequate data. Based on the $500,000.00, the difference between the 6% and 8% guesses is $10,000.00. Now ask yourself, can the church take the hit of 10,000, based on all of this guess work? Probably not. Is there a better way?

Correctly forecasting donations (revenue)

One of the most important things to have for forecasting revenue with accuracy is using data. The data should include information from the organization’s giving history, analyzing trends either nation or worldwide, how other organizations are doing in your area, and so on. Let’s use one example in the area of analyzing trends.

We can see major church fundraising events are falling out of favor. For example, a trend may show that church auctions are going down in revenue, nationwide. Unless your church’s auction(s) buck this trend, the church may want to think of another type of fundraiser. We are using an auction in this example, but the same can be said for regular weekly/monthly donations. Any changes should be reviewed based on your church’s historical data.

No Checks or Balances

Managing church finances should always include a process for checks and balances in the day-to-day operations. Without common-sense checks and balances in place, one of the worst things can happen — embezzlement. We talked about embezzlement in another blog post.

Let’s use a simple example. The church should not allow the same person that receives donations for the organization to also write checks to pay the expenses. The proper checks and balances process is the church having one individual who receives money- only. And then another individual that writes checks for the organization. Additionally, these two individuals should not be related to each other.

Don’t Mess Up Payroll

Let’s get blunt about payroll and the IRS. While churches enjoy many tax-free benefits, paying staff payroll taxes to the IRS is not one of them. The fastest way to invite the IRS to review the church’s accounting books is to mess up payroll. It’s like opening a big can of worms.

It doesn’t take much for the IRS to get involved with auditing a church’s accounting books and other documents. A big trigger is misclassifying an employee as a 1099 independent contractor (IC) instead of a W-2 employee. There are specific criteria that the person must meet in order to be a 1099 IC.

There are two other triggers that could also flag an organization for an audit.

• Not paying the taxes on time for your staff, or
• Not paying the right amount on their behalf.

Needless to say, payroll for any organization is a complicated process. When you add in all the ways pastors are paid versus regular staff, nonprofits really must watch their payroll.

Managing Church Finances Summary

As we said, budgeting is a very, very small part of the church’s overall financial planning process. However, budgeting seems to take an enormous amount of time. Many of the topics discussed in this blog post are rarely reviewed when churches conduct annual meetings. Organizations need to focus more on emergency funds, debt management, financial literacy, correctly forecasting revenue, payroll mistakes, and so on.