If you haven’t read the first part or second part of this series please take a moment to read them.

4. 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.
   1. 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.
5. 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.

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.

1. 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. 🙂
   1. 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.
2. 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.
3. 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.

Read part three.

How many times have church leadership heard a similar phrase to, ‘But I haven’t spent my budget’, when discussing ministry finances?

In working with churches and their accounting systems, which involves budgeting, I see a lot of focus around budgets instead of the standard financial accounting reports approved by FASB (Financial Accounting Standard Board). While budgets are good tools, nonprofits must understand they are only a tool and don’t replace common sense understanding of financial statements.

Budgets don’t tell the organizations if it’s financially healthy or if they can embark on a new project or mission. Furthermore, when your audited, budgets are not even looked at, but in many instances have the most time devoted to them by staff or volunteers. Auditors want to know the revenue that came in and what you actually spent the money on – not what was projected. 🙂 From the perspective of auditing and organizational financial health, the budget which has the most time dedicated to it, has very little if any importance. It would appear that financial statements that show what actually happened is more important, but less time is devoted in understanding them.

If I could make an analogy here about budgets and what they have become to many organizations – not just non-profits. Budgets are treated like a storage tank for each line item. For example, at the start of the fiscal year, this storage tank gets filled up with all the money for each line item so each ministry has their allotted money for the year. There’s one enormous problem with this thought process. The organization hasn’t collected the money to fill the tanks up yet. Because the organization is just starting its fiscal year and needs donations to fill the tanks, the ministries can’t assume they have the money because the budget says so. The tanks get filled as the year progresses and donations come into the organization, not on the first day of the fiscal year.

Stay tuned for the second part in this three-part series. We will discuss some budget assumptions that can really turn things upside down.

Read part two

Read part three