How to Calculate a Church Budget

Every church I've worked with has struggled with determining the amount at which to set the subsequent year's budget. Everyone wants to increase the budget in order to provide more funds for staffing and programming (rarely for building needs, but that is another matter). But Finance Committees know that even if they put a figure out there, it means little if the income/receipts/revenues don't come in to support that budget target. Committees want to step out in faith, but they also don't want to be caught overstepping (and dropping into a financial void). So, what's a church Finance Committee to do?

Here's my idea:

• In the month that you set the budget for the next year, look back 12 months and calculate how much money came in during that period. That figure is your budget for the next year.
• For instance: 
• Your fiscal year is the calendar year
• In July and August, ministry areas work on their respective budgets with a deadline to get their requests to the Finance Committee by August 31
• The Finance Committee gathers all the data to finalize the budget by September 30 so that it can be voted on in October
• At their July meeting, the Finance Committee looks at the total undesignated receipts for July 1 through June 30 (the previous 12 months). That figure is the new budget for the fiscal year that starts in January (six months away).
• Whatever that increase (or decrease) is over the current fiscal year, that percentage (up or down) is communicated to all the ministry areas as to how much they can increase (or decrease their budget.

This has many benefits:

• This is a conservative or fiscally prudent way of budgeting - churches should receive at least that amount in the next 12 months, perhaps a good deal more.
• This means that you shouldn't have to go into spending freezes and hurt the morale of the staff and church
• This enables the church to continue to plan well for its ministries and not feel it is over-reaching financially
• If more money comes in than was budgeted, the extra money can be used for capital needs, rainy-day or reserve fund(s), money for unforeseen opportunities, additional money for budgets that were shorted, etc.

This process makes short work out of deciding how much you'll budget for the next year. That will enable the Finance Committee to focus on more important things such as assisting ministers, ministries, and members with good stewardship practices.

Lead On!
Steve

Budget Percentages

Below is a recent email exchange with a friend of mine (names omitted).

Email Question:

I have a church that wants help examining their budget allocations by categories: missions, personnel, programs, etc. They want to look at similar size churches with similar size budgets. They want to know whether their allocations are in line for their type of church. Basically, they want to benchmark their distributions. They suspect that their personnel budget at 67% is high, but the church doesn't know any different. And they want to know why they do not have any money to do actual programs.

Do you have access to any sort of database like that from any of your connections?

My response:

1. No, I don’t know of any authoritative written source of ratios. Sorry.
2. My experience tells me the following makes commons sense

a.      Personnel

                                                              i.      Range of 40-60% of undesignated receipts

                                                            ii.      Ideally about 50%

                                                          iii.      This includes the ministers and administrative assistants – people key to accomplishing the goals, mission and vision of the church

b.      Facilities

                                                              i.      Range of 15-25% of undesignated receipts

                                                            ii.      Ideally about 20%

                                                          iii.      This includes facilities staff costs

                                                          iv.      The percentage will be higher if a church has debt; lower if there is no or low debt.

                                                            v.      A church should spend annually about 2% of the cost of replacing the building on maintenance. If you have a building worth $1 million, then spend about $20,000 on maintenance. The rest of the percentage will be spent on salaries, utilities, cleaning supplies, commercial property insurance, capital reserve funds, etc.

c.      Programming

                                                              i.      Range of 20-35% of undesignated receipts

                                                            ii.      Ideally about 30%

                                                          iii.      This includes education, worship, missions, funds budgeted for allocation to outside organizations (Cooperative Program/Missions), etc.

That being said, these percentages go wild in various types of churches. New, emerging, highly growing churches have very high salary percentages and loads of debt. Older, established churches have paid off their debt so their programming is high and salaries have stabilized in the 50-60% range. While there is no “one size fits all” there are well-grounded rules that will help a church stay out of fiscal trouble. Hope this helps.

Lead On!
Steve

Money-Saving Tips

Flourescent Lights

• Change your incandescent lights to compact flourscent bulbs and remove all incandescent lights (except those you need for formal rooms with lamps).
• Change your flourescent tubes from T-12 to T-8. T-8 tubes use 30% less power but put out as much or more light as T-12 tubes.

Motion Sensors

• Install motion sensors which turn on lights when people walk into a room or down a hallway. While these motion sensors do cost to install, they will pay for themselves within a year or two.
• If you need to phase in the motion sensors due to the cost of installation, start with hallways, then go to closets and bathroooms (where people frequently forget to turn off lights), and then go to classrooms and offices.

Lead On!
Steve

Strategic Budgeting

It's that time of the year - church finances committees racing against the clock and sometimes against the staff and members to present to the church a balanced budget. In most cases, the budget looks similar to last year's budget with a few changes.

There are many ways to create a budget for the next year

• Last year plus budget - take last year's numbers and add or subtract a certain amount or percentage in order to get a figure for this year's budget. This is simple, quick, and easy. That can be good but you've got to realize going into the process that you're taking the easy way out.
• Zero base budget - this is more complicated and eventually more satisfying. Start with a clean slate for each ministry area (music, education, administration, missions, etc.). Then, plan and put a price tag on every event and activity you'll do next year. Don't leave out anything.
• Strategic budget - this type requires a lot of financial and leadership backbone. Don't go here unless you're ready to lead. Like the zero base budget, start with a clean slate. Then, decide what part of your church's mission is "that which you cannot live without" - what part of your church's purpose is so integral to your critical path that should you not do that, your church will cease to exist. After deciding what is number one, then determine number two, and number three, etc.
• Put everything on the table - remove from the equation all positions and people. Think rationally and not emotionally about what it takes to accomplish your church's mission and vision. Ask questions such as, "Do you need a senior pastor (or can you show videos from a mega church)?," and, "How many administrative assistants and ministers do you need to carry out each long-term strategic mission goal."
• When you have settled on your number one priority, then determine how much money you need to fund the programs and personnel for that mission. Okay, now set money aside from your anticipated next year's revenues for that goal. Move on to the second goal, determine what it is and fund it appropriately with personnel and programs. Go to number three, four, etc. Do this until you run out of money (most finance committees can tell you how much money the church will recieve next year).
• There, you've created a strategic budget. The nitty-gritty details of how the budget line items will come about are done through the zero-base budgeting process. That is the second step to creating a strategic budget. Zero-base budgets can be done alone but in the long run it will help the church more if they are done in conjunction with a strategic budget.

Here's the bad news. The financial leadership teams of most churches and the senior pastors are unwilling to develop a full-blown strategic budget. It requires a lot of time and effort. It may require terminating staff and programs that are loved by members. It can be very painful.
Here's the good news. A strategic budget of this magnitude only needs to be done every 3-5 years. That is about how often corporate America re-structures its management. Business wants to ensure they are going in the rigth direction for their organization and that they have the right staff to make it all happen. For the in-between years' budgets, you can rely on a zero-base budgeting process.
After all the behind the scenes work is done, church members will see what are the church's primary goals, how they are funded, how they are staffed and what programs will be done to make them happen. Members can talk about what their church is doing (and not just "being") and they can buy into the vision, both as volunteers and as donors.
Oh, how many goals should a church have? Probably no more than a handful (3 or 4) and each goal should have no more than handful of programs. Keep it simple, keep it focused.


Lead On!
Steve