By: Larry Mills, Ph.D.
A budget is a guideline for resource commitment. The budget becomes the vehicle through which our “intended” actions are translated into tangible commitment! One can verbally play “mind games” about what they are setting out to accomplish but the budget becomes the contract of commitment to the accomplishment of certain goals. An organization’s true commitments are much better revealed by its budget than by its public relations releases. If one wants to understand the federal government’s commitment, don’t listen to political speeches; instead, analyze the federal budget. The same can be said about any organization, including the church.
Biblically, the admonitions seem clear. In Ecclesiastes 2:14 one finds “The wise man’s eyes are in his head, but the fool walketh in darkness.” Clear suggestion is made that planning, or “forward looking,” is a part of the wise person’s arsenal. In Matthew 25, in the parable of the talents, Jesus distinctly says stewardship will be rewarded with “well done” and lack of good stewardship will be addressed with “You wicked and slothful servant.” Our commission as stewards of God’s resources demands that each of us be prudent and wise. If the nation’s corporations deem budgeting to be essential to good management of resources, how much more critical must it be to manage the church resources to their maximum potential? Budgets provide the opportunity to create maximum “value laden” dollars, with every possible return on each dollar expended.
A budget is a planning tool. Before any organizational action takes place, a commitment of resources is placed on record. Robert Fulmer has said, “Failing to plan is planning to fail.” Failure to provide advance thought puts the organization in a position of reacting to destiny rather than shaping destiny. K. von Clausewitz stated, “Most battles are won or lost before they are engaged, by
men who take no part in them: by their strategists.” The budget is of strategic importance in the church fulfilling her mission. By dollars expended the church places “on the line” its commitment to various goals.
Dwight Eisenhower said it this way, “Plans are nothing. Planning is everything.” In his astute observation, Eisenhower was able to strip away the outer appearances that trouble many, and get to the heart of the value of planning. The key is the process one goes through to get a plan, not the final document with dotted “i’s” and crossed “t’s.” If one focuses only on the end product, a budget listing columns of numbers to live within, one misses entirely the most important part of budgeting. A budget is intended to influence and shape destiny. Through planned forethought, the best alternative use of limited resources can be examined, discussed and acted upon.
For those getting nervous about placing too much emphasis on man shaping destiny, and not enough emphasis on letting God shape destiny, be reminded of person after person in the Bible who acted in the power of God to help shape destiny. How about Noah? He could have easily said, “If God wants me to live, He will make me float.” Or how about David? He could have said, “If God wants Goliath dead, He has a whole list of diseases to choose from. Throw a stupid rock-never!” The list could go on-it need not. Personally, the future is important because I plan to spend the rest
of my life there. It seems reasonable that God prefers the future to be influenced for the greatest amount of good. Budgeting can play a small part in making that happen.
Why are budgets threatening? Assuming one buys any of the preceding logic as to why an organization should budget, why is budgeting a nasty word? Many reasons for failure to use the budgeting process actively and wisely could be given. A few include:
1. “Fear of failure.” If a budget is not set, I don’t know when I’m out of line so there is less failure. (The faulty logic in the reasoning should be readily apparent.)
2. “Our revenues are so unpredictable.” This may be true but is usually a rationalization for spend now and worry later.
3. “Budgets lock us into a straight-jacket, keeping us from really meeting needs.” If this occurs it is the fault of the budgeter, not the budget.
4. “We restrict God’s chances to ‘move on us’ with budgets.” Nonsense! If God can move mountains, he can move budgets.
5. “We don’t know how to budget.” If so, read on! You are about to lose this reason.
How to budget?
Several questions must be addressed in the “how to” of budgeting. None of the questions are particularly difficult. They include:
1. How often should we budget?
2. Should we use a fixed budget or a flexible budget?
3. Should we use a historical base to our budgeting or a zero-based concept?
4. What items should be in a church budget?
5. Who should be involved? How do we decide how much to spend on each item?
6. How do we manage the budget once it is made?
Answer these questions and you are on the way to profitable use of budgeting. Let’s now take a look at answering each of these questions.
Question One: How often should we budget? The two most common “timing” approaches to budgeting are to budget once a year, either on a calendar-year or church-year basis, or to operate on a continuous or moving budget basis. Annual budgeting is the most commonly used, setting up a budget process in the last quarter of the year to develop the next 12-month budget. The major advantage is that this process is less time consuming than the alternatives. The major disadvantage is the lack of continuity in budget thinking that comes with only doing it once every 12
months and getting “cold” in between.
The continuous or moving budget concept involves updating the budget every month or every quarter. If a quarterly update is chosen, each quarter one adds a fifth quarter to their current budget. For example, if you are in the fourth quarter of 1983, you would be adding the first quarter of 1985 to the end of your budget. In this process, you always are adding a quarter to the end, updating the quarters in between so that the budget is always at least one year in advance. The major advantage of the continuous budget is staying in constant touch. The major disadvantage is a moderate amount of extra time involved in following this process.
Question Two: Should we use a fixed budget or a flexible budget? A fixed budget is a budget developed on a set projected amount of revenue. After estimating the total revenue, expenditures are set accordingly. A flexible budget, on the other hand, sets several possible revenue levels and then sets expenditures in relation to the different revenue levels. For example, a church projects revenue for the next year at $375,000, $425,000 and $475,000. A budget is built under each projected revenue, with matching expenditures. There will be some expenditures that will be the same amount regardless of the amount of revenue. Other expenditures will be more or less depending on the amount of the revenue to spend.
Many organizations get in trouble with budgets when they have projected revenue to be a given amount and when they get halfway through the year it becomes very obvious they overestimated revenue greatly, but now have established spending patterns on the high expectation. What do we do now? If you were playing football, you would drop back and punt! Since the bank won’t let you punt, there should be care taken to avoid this predicament. The flexible budget provides a partial solution, though there is no substitute for good revenue projections. If the organization had developed a flexible budget with three projected revenue levels -low, expected, high – at periodic points during the year, one could look at revenues and see which revenue track appeared to be happening and then compare actual expenditures to the budget under that particular revenue projection.
For example, if the organization was operating on the expectation of $425,000 of revenue and spending accordingly, but after three months saw that $375,000 in revenue was more realistic , they would then adjust spending for the remainder of the year to the $375,000 flexible budget level. Keep in mind, corresponding expenditures, not spending what one wants to and then figuring out where to get the revenue! Everything is predicted on the revenue projection.
Regardless of whether a fixed budget (single revenue projection) or a flexible budget (several revenue projections) is used, both require a monitoring process that makes corrections necessary. The flexible budget merely provides for more readily adaptable maneuvering when the revenue projection is off from the expected. More on the managing of the budget later.
Question Three: Should we use a historical base to our budgeting or a zero-based concept? Standard practice in most organizations is to use a historical approach to budgeting. This approach involves taking last year’s figures, making small corrections for inflation or other variables, and using the adjusted figure for the current year. The major advantage of this approach is ease. The major disadvantage rests with the assumption that last year is the best gauge of what should happen next year. Revenue projections based on historical trends is a very plausible approach. Use of trend analysis, the past four to five years of revenues, can be a very valuable aid in budgeting revenues. On the expenditure side, however, historical figures are more suspect. Can one be sure the past figures are a good basis from which to start the budgeting process for expenditures?
Peter Phyrr of Texas Instruments has answered the above question with a “No!” He suggested a concept called zero-based budgeting. Another gentleman, at the time going by the name Governor Jimmy Carter, brought the Phyrr concept into government circles in the state of Georgia. The idea behind zero-based budgeting is very simple. Zero-based budgeting means each budget year begins with “zero” guaranteed funds to any program or expenditure area. Budget is only established when justification proves the expenditure still has merit in helping the organization
accomplish its mission.
There are no guaranteed, locked-in, perpetuating expenditures. Again, philosophically this concept has much to offer. It keeps expenditures from occurring every year just because “that’s the way it has always been done.” However, zero-based assumes a very clear understanding of mission and specific objectives. A little later in this article, when discussing budget development, we will return to this topic.
If historical budgeting is used, care should be taken to avoid the pitfall of assuming what has been good enough in the past will be good enough in the future. If the zero-based concept is used, care should be taken not to get so “hung up” in creating “justification” that one forgets the organization’s mission.
Question Four: What items should be in a church budget? One of the early needs in the mechanics of budgeting is to establish a “laundry list” of items (accounts) that should be included. No claim is made to provide a perfect, all-inclusive list. However, in the interest of providing a point-of-departure, a list is displayed in Figure 1. Take the list and “tailor” it to fit the needs of your particular setting. If there is no current budget, a good place to begin is with the last six months’ checks.
Go through the check stubs and see where each check would fit in Figure 1. In a short time, you can have a solid set of categories. Avoid having a different category for every expenditure made. Care should be taken to use “miscellaneous” accounts as little as possible.
Question Five: Who should be involved in deciding? How do we decide how much to spend on each item? Who should be involved in the budgeting process? In the normal church setting the budget makers should include the pastor, any staff members, and the church’s governing board should provide the “standing back” perspective, help and staff, because of being involved in day-to-day operations, play a key role in providing the “hands-on” perspective to the budget. The governing board should provide the “standing back” prospective, helping to put expenditures in line with objectives. The pastor must take the lead role in directing the budget process. However, the greater the input from all involved, the greater the likelihood of commitment to the final budget.
How to spend? There is never a shortage of places to spend, only a shortage of spending in places. Unlimited needs and limited resources make church budgeting a critical process. How do God and the “kingdom” get the greatest return on their investment? That is what budgeting is all about!
Good budgeting starts with a sound understanding of mission and objectives. The mission statement of the church should be well defined. It is an address to the question, “Why do we exist as a church?” Many churches believe they know, but you could never figure out their mission by looking at their budget. One should be able to pick up any church budget and see a reflection of the mission statement through the church expenditures. A mission statement could be as simple as “leading souls to a personal encounter with Jesus Christ.” It could be much broader to include educational programs, caring ministries, feeding the hungry and evangelizing in foreign nations. An organization cannot budget effectively without clear understanding of its mission.
After the mission is established, specific objectives should be determined. Objectives are a desired attribute, measured and accomplished by reaching some point within a particular time frame. When the church has objectives set, it may then “prioritize” those objectives which then gives the guidance to make budget decisions. It cannot be emphasized enough how important mission understanding and specific objectives are in being able to plan an effective budget!
Next in the budget process, the forecast of revenues. How much do we have to work with? A conservative approach, all other factors equal, is to use last year’s revenue as your budgeted revenue. Then, any growth in revenues can be used for contingencies. If there is no growth, you have played your expenditures safe. If your growth in revenues in the past five years has been a steady pattern of growth, you may want to budget on the anticipated growth. This decision rests in the collective attitude toward risk-taking.
Some pastors fear that by making revenue projections they will limit what God wants to do. They say, “Don’t limit God through your lack of faith.” My response to this feeling is very simple. I have yet to see my first case where the ink on the budgeted revenue couldn’t be blotted out and greater revenue written down when projections were too low. On the other hand, I have seen several cases where, under the “guise of faith,” man’s irrationality destroyed God’s work. Revenue projections need to be made. They in no way need to restrict one’s faith!
Once revenue is established, the “pie” must be divided. The one overriding goal – how can God’s work best be accomplished with the given amount of revenue. At this point in budgeting, the most convenient way to proceed is to take what has been spent in the past and adjust accordingly. This is a convenient, easy method. Let me suggest one caution. The federal government has practiced this for years. Need more to be said? The church, like the government, is service-oriented it is not a manufacturing firm. Manufacturers can clearly, distinctly measure profitability, growth and product innovation.
The church is in the “people building” business. Helping people reach for everything God has for them is not as easily measured. Thus, it is much tougher to budget when intangibles are the final outcome, as opposed to tangibles. The difficulty can be seen in viewing how the federal government budget has grown. Budgeted programs just keep being added with very few deletions. The difference, though, between the government and the church is the power of taxation. The government covers its budget mistakes with higher taxes. The church doesn’t have that option! If God is going to get the greatest benefit from each dollar, the church must do it right the first time.
As a figure for each expenditure category is developed, the expenditure should be reflected against the objectives. For example, assume one objective is evangelism, a second objective is to minister to the poor, and so on.
When developing the expenditure for the building debt service ask, “Will this expenditure aid in accomplishment of evangelism, feeding the poor, etc.?” You may want to build a “number rating” system for how well a given category of expenditures fulfills your objectives. For example, on a scale of 1 to 10, maybe the building debt expenditure gets an “8” in helping evangelism, or a “1” in
feeding the poor. This rating process will not tell you exact dollar amounts to spend, but it will bring some congruency between objectives and expenditures.
After going through all the expenditure categories, the total expenditures should then be compared to expected revenue. In most cases, expenditures will be above revenues on the first time around. At this point in the budgeting process, it is time to start “paring” the expenditures. What should be cut? This part of the budgeting process is always painful. However, with any worthwhile endeavor there is always a little pain involved.
If individuals in the organization who are involved in the budgeting process have learned to “play the game,” they have “padded” certain expenditures knowing you “never get all you ask for.” The key in this case is for a budget committee to be perceptive enough to discern the “fat”! If no “games” are being played, the key to bringing expenditures in line with revenue is to focus on objectives. Top priority objectives should be given preference over lower priorities. “Prioritizing” for most administrators, is very difficult. We confuse low order priorities with the “underdog,” and the “American Way” is to fight for the underdog. The outcome of this faulty logic is to take expenditures from top priority areas, diluting them to mediocrity, in order to fund the lower priority areas, which at their best provide mediocre results. Trying to share the wealth with all priority levels causes the organization to lose in the long run! Face up to the fact that the budget process is not the place for the “weak of heart”!
With the expenditures hammered out, the next step is to put the budget together into a format that can be monitored during the year. Figure 2 provides a sample of a format that is fairly easy to administer. More on this in question six which follows.
Question Six: How do we manage the budget once it is made? With a budget made for the next year, the managerial emphasis shifts from the planning function to the control function. Mentioned previously, Figure 2 provides a sample of an instrument to be used for control. The format of the form is not nearly as important as the controlling process. That control process means bringing together the actual expenditures from the checkbook into a common meeting place with the budgeted amount. Each check written should be labeled on the check stub with the title of one of the budget categories. If this is done, it then only requires collecting all checks written to a ledger account, totaling the accounts, and comparing the totals to budgeted amounts.
How often should the budget comparison take place? There is no right answer to this question. Some organizations prefer to do it monthly, some prefer quarterly, and some semi-annually. The best compromise is probably quarterly. However, if monthly is felt to be needed, by all means go that route. Again, referring to Figure 2, you will notice that the “actual” columns for each quarter are sub divided into an “amount” and “year-to-date percent of total” column. The amount column is the place to record the dollar expenditure during the current quarter. The “year-to-date percent of total” gives you a quick flagging of any expenditure that is out of line.
Notice in Figure 2 the percentages that are circled. In the first quarter, expenditures should be about 25 percent of the total budgeted amount; at the end of quarter two, about 50 percent of the total budgeted amount. By this method of flagging expenditures, the control of the budget becomes a fairly routine, mechanical process. It should also be understood that monitoring revenues and
comparing to projections is critical. Since any deviation in revenues precipitates action on one’s expenditures, a close watch of revenues is in order.
Proper monitoring of the budget is just as vital as planning the budget. Without two sides to scissors, it is very difficult to cut!
Summary
In the words of Russell Ackoff, “The thing to do with the future is not to forecast it but to create it. The objective of planning (budgeting) should be to design a desirable future and to invent ways to bring it about.” For the church to fulfill its God-appointed mission requires astute financial planning! The budget is a vehicle for that purpose. To summarize, budgeting involves the following
steps:
Step 1: Set the time frame for creating a budget (annually or continuously updating).
Step 2: Decide on budgeting at a fixed revenue amount or whether the concept of variable budgeting will be used (different budgets for different projected revenues).
Step 3: Decide whether to use a historical base or a zero-based concept (build on last year’s figures or assume every expenditure starts at zero until justified.)
Step 4: Establish budget categories.
Step 5: Who will be involved in the budgeting process? Make sure each one who is to be involved has proper information. If there are too many involved, establish a representative budget committee.
Step 6: Hold meeting(s) to “hammer out” a budget. The meeting may need to be preceded by a meeting regarding mission and objectives only.
Step 7: Get the budget printed in acceptable format to provide for monitoring.
Step 8: Make sure record-keeping is done using budget categories.
Step 9: Monitor actual to projected budget on whatever time frame is selected. Take corrective action as needed.
FIGURE 1
CHURCH BUDGET CATEGORIES
REVENUE
Tithes
Offerings
Interest
Fees
Building Fund
Various “Earmarked” Offerings
Miscellaneous
CAPITAL EXPENDITURES
Property/Eqiupment (Purchase)
Debt Service (Principle and Interest)
Major Property Improvements
OPERATING EXPENDITURES
Personnel Salaries
Expense Allowances
Travel Allowances
Employment Taxes
Health Insurance
Life Insurance
Pension
Personnel – Misc.
OFFICE/CHURCH SUPPLIES
Office Supplies
Church Supplies
Postage/Printing
Telephone
Supplies – Misc.
PROMOTION
Church Newsletter
Advertising
Promotion – Misc.
SPECIAL SERVICES/MINISTRIES
Revivals/Crusades
Ministry-
Ministry-
Special Services – Misc.
CONTINGENCY FUNDS
Contingency
PROPERTY CARE/MAINTENANCE
Utilities
Janitorial Supplies
Property Insurance/Taxes
Property Repair/Maintenance
Rent
Vehicle Repair/Maintenance
Vehicle Operating Cost (gas, oil, etc.)
Vehicle Insurance/Taxes
Property Care – Misc.
MUSIC
Choral Supplies
Instrument Maintenance
Sound System Maintenance
Robe Allowance
Special Musicals
Music – Misc.
FUNCTIONAL AREA EXPENSES
Nursery
Children
Youth
College
Adult
Senior Adult
Sunday School
Lay Ministry
Evangelism
Recreational
Functional Area – Misc.
SPECIAL BUDGETS (DENOMINATIONAL)
District
National (General)
College
Missionary
Special Budget – Misc.
EARMARKED GIFTS
Memorials
Teen Trips
Camp
(The above material was taken from the book, Solving the Ministry’s Toughest Problems.)
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