In any business or organization, finances are required to operate in a healthy and thriving manner. It doesn’t matter if the organization is a church, bakery or RV park, finances are a necessary part of the organization’s maturity. And in the case of a church, having a budget is a necessary approach to assure the church’s members their donations (tithes) are being stewarded appropriately.
For the past 4 years, I’ve been building out and maturing the budget for my church. It’s not an easy thing and certainly keeps on evolving as the church grows.
Don’t let that intimidate you though. There are some fundamental truths that I will share to get you on the right path.
Once you get these nailed down, you’ll be in a great spot to creating and maintaining a church budget.
Shameless plug… Don’t forget to check out my article on How to Pick the Right Accounting System for My Non-profit. In my opinion, you need an accounting system. You’re welcome to use spreadsheets if that makes you feel more comfortable, but you’ll soon get tired of the manual processes and need something more fitting for your church.
Should a Church have a Budget?
The short answer is YES! A church needs a budget.
Think about your family for a minute. You and your spouse likely bring in at least one paycheck for your household, and you at least have to pay for a mortgage (or rent), utilities and food.
As your family grows, you’ll want to begin planning for your children’s colleges, for retirement, for a vacation and everything else. How do you know when you’re ready to do these things unless you’re tracking your finances along the way?
The same truth holds for a church. Churches need budgets to define how to bring in money and where the money is spent. These budgets act like a map for church leaders to follow.
Following a budget also helps hold churches accountable to their congregation and allows them to follow their mission of reaching more people like it says in the Great Commission:
Therefore go and make disciples of all nations, baptizing them in the name of the Father and of the Son and of the Holy Spirit, 20 and teaching them to obey everything I have commanded you.– Matthew 28:19-20 (NIV)
What is the Purpose of a Budget?
Let’s dive a little deeper in the purpose behind having a budget. First, think about your church and see if any of these questions stir something in you:
- Does your church have difficulty meeting its financial commitments?
- Does your church have an emergency fund?
- Does your church have a (growing) savings account?
- Do you collect enough donations through tithes & offerings?
- Do you have vision to grow your church?
- Are your ministries and salaries proportionate to the amount of donations coming in?
These questions get answered when you have a budget that is reviewed and reconciled on a monthly basis. In the end, you want to confidently know your church is financially in it for the long haul.
What Should a Church Budget Include?
Investopedia defines a budget as
an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis.
As a church, this means you need to figure out everything you’d consider “income” (or revenue) and everything you’d spend money on (expenses). Let’s break these down a little further.
Many people think tithes and offerings are the only income a church receives, but this isn’t entirely true. Let me explain.
When a church puts on an event or conference, there’s sometimes a registration fee the attendee pays for the event. This is income.
If your church has a bookstore or resource center where it sells things like t-shirts, books and gifts, this is considered income.
Perhaps your youth group has an annual summer camp or your children’s ministry has a vacation bible school (VBS). Both of these are considered income.
Essentially, income is any money coming in to the church.
Take a few minutes, grab a coffee and write down a list of all the sources of income your church has. We’ll use this in a few minutes.
On the expense side of things, it includes everything your church spends money on, regardless of its purpose.
This can be an exhaustive list so I’m going to give you a sample list of items for you to see if they apply to your church:
- Bank Fees
- Professional Services
This is by no means everything that could be considered an expense, but hopefully it does get your wheels turning on ideas.
There’s something important to remember when creating your list of incomes and expenses.
These are called “categories” or “chart of accounts” in the accounting world. You want these categories to be specific enough so you know what goes into each bucket. However, you also want them to be generic enough where you can reuse them year over year.
For example, let’s say we have youth camp every summer at a nearby retreat center. It costs money to rent that retreat center, right? If we created an expense category for the rental fee called “Youth Summer Camp Fees” then we could easily use it every year. But what about the women’s ministry that also goes to a retreat center every year?
It wouldn’t make sense to create a category for every ministry and for every need they had. It would be a headache for you to manage all of those every year. However, you could create a category called “Facility Rentals” to capture all of those. Or you could even put it in the “Facilities” category along with your own church building expenses. Either of these would be a great way to categorize the retreat center rentals.
3 Steps to Creating a Church Budget
Now that we’ve gone through, in some level of detail, what makes up a church budget. Let’s get into the nitty gritty of creating one. I’m going to break this into 3 steps
- Creating a template (I have one for you to start with)
- Filling in your budget
- Rinse and repeat
Step 1: Creating a Template
When you’re trying to create a budget template, I recommend using Excel or Google Sheets. In my opinion, Google Sheets is actually better because it’s easily shared with other members of the team, and there’s not multiple versions flying around in everyone’s email.
If you haven’t already seen this article, I wrote one recently on How to Get Google G Suite for Free as a Nonprofit, which includes Google Sheets.
The below template is a great one to get started with. I began using one just like it when I first starting putting an annual budget in place at our church.
You can modify a template like this anyway you’d like, including coloring the different months, different formulas, etc.
At the heart of it though, this template is based on the following equation:
Income - Expense = Net Profit
We always want the Net Profit to be positive, which means you’re planning (budgeting) to bring in more money (income) than what you spend (expense).
As we move into this next step to filling out your budget, our goal will be to keep net profit positive.
Step 2: Filling in Your Budget
As you’re filling out your budget, there are a few things to be mindful of as you move from month to month.
Remember this is a budget. This is what you plan to do based on everything you know at the time.
Take your best guess to how much in donations you’ll receive each month. For most churches and non-profits, this is your primary source of income. It’s best to first nail this number down, each month, so you’ll know how your net profit is going along the way.
With the donations entered, it’s now time to add in the rest of the potential incomes and then expenses. My suggestion is to add in everything at first, regardless of the initial net profit. You want all of the information in this template so it’s as complete as possible.
Once you’ve made your first pass at the spreadsheet, it’s time to go back and see where you need to make any budget cuts.
A good rule of thumb is to have at least 10% of net profit in the positive. This is called net profit margin. Take your current net profit for each month and divide it by the total income for that same month. If it’s 10% or more, consider that month solid. If it’s less than 10%, take a look at your expenses and see where you can save some money.
Another Important Note
The approaches I’m sharing here are geared towards normal business operations. What do I mean by that? In a normal business operation, you’re not trying to pay down a massive amount of debt, and you’re not in a capital campaign of some sort.
If your nonprofit or other organization is in one of these unique scenarios, you probably need a net profit margin of 20% or more. Whatever the case may be, do what makes sense for you.
Don’t Forget the Review
Once your budget is completely filled out, get a second opinion. Find two or three people you trust, perhaps key leaders in your organization, and walk them through your logic in creating the budget. Ask them to pose the hard questions as you walk through it. You want to feel confident in your approach, confident in your numbers and be able to defend it if asked.
Managing finances at your church, a nonprofit or in any organization is never a one-person operation. It must be collaborative, and communication is key. That’s why it’s important to get other sets of eyes on the budget.
Step 3: Rinse and Repeat
With your initial budget now in place, it’s time to maintain it. This is where an accounting system is extremely helpful as it will do some of the legwork for you and prevent math errors.
Take the budget you created and import it into the accounting system of your choice. At the end of each month, compare how much each income and expense line was budgeted to be (budget) against how much it actually was (actuals). Your accounting system will often have a pre-built “budget variance” report you can use to do this automatically for you.
This comparison needs to be done on a monthly and quarterly basis. Hence the “rinse and repeat” statement.
If you haven’t noticed, a lot can happen in 365 days. Projects can change, large donations can come in, an air conditioner can break, and everything in between.
Therefore, as you manage and maintain your budget month over month, key a journal of everything that changes along the way.
This is important for two reasons:
- It gives you better information to plan with as you do your budget the next year.
- When you’re preparing for an annual business meeting to your church or creating an annual report for your donors, you’ll know what’s changed each month and can explain it better.
This journal doesn’t need to be anything fancy. Simply add a tab to your budget spreadsheet and include the date, description and amount for each change.
In this article, I explained a simplified approach to creating and maintaining a budget for your organization. Regardless of whether you’re a startup, a church, or any other small business, creating and maintaining budget takes a lot of work.
Use the approaches I’ve outlined here as a starting point to create what works well for you. And if you need help, reach out. It’s my heart and passion to see organizations with a powerful mission thrive.