Church Budgets: Top 10 List (part 2 of 2)

Posted on February 25, 2014 Written by

[See last week’s post for part 1.]

6. What are the percentages that should be used as a rule of thumb?

A church spends money on three things and the rule of thumb is that you should spend the following ranges on each of these areas:

  • Staffing: 40-60%, ideally about 50%
  • Programming: 20-35%, ideally about 30%
  • Buildings: 15-25%, ideally about 20%

Percent of WHAT? There are two ways to measure this

Operating Budget – the budget is an easy and pre-defined way to measure. These percentages can be seen even before the first dollar has been given to the budget for that year.

All Actual Receipts – a better way is retrospective by looking at the prior year’s expenses on all areas and all receipts. This is more complicated but it gives a better result.

  • Look at ALL RECEIPTS not just operating budget (all monies received for all causes and purposes): operating budget; mission offerings; events, trips, and activities; food service; designated gifts; etc. Count everything that comes in.
  • Look at ALL EXPENSES for each area. There are many expenses paid from designated funds which are not part of the operating budget. Count all those expenses.
  • Do the math to get the most accurate percentage of where the church is spend all of its money. Most churches will end up spending far less on staffing and building than what is in the operating budget and a lot more on programming.

 

7. What about capital budgets?

  • Capital budgets are monies that are used for major building expenses such as new heating and air conditioning equipment or gutting and overhauling rooms.
  • Capital expenses often don’t fit into the operating budget and thus are paid from capital campaigns, the generosity of some members, creative finances, funds leftover at the end of a fiscal year, or a combination of some or all of the above.
  • Most churches cannot afford to put a line their operating budget for capital expenses – their current operating budget is too tight. However, all churches must face the reality of capital needs and thus must have a plan for how to handle these expenses.
  • All churches should have a list of capital needs facing the church over the next ten (10) years. That gives the church’s leadership an idea of how it needs to plan financially to face the certainty of aging equipment, leaky roofs, inefficient heating units, etc.

 

8. Can you use designated funds in the budget development process?

Yes and you should. Some people prefer to give to specific purposes and not to the operating budget (a better term is “Ministry Budget” or “Mission Budget”). It impossible to pre-determine how much will be given to designated funds but you can have an educated figure.

Designated funds are secondary, not primary sources of the budget for that purpose. Plan your operating budget first and then plan the “what-if opportunities” for monies given to the designated fund.

 

9. To whom is the budget presented?

  • The more the better. Tell as many people as possible about the budget. The more people that know and understand the goals of the budget, the more “buy in” you’ll have when it comes to funding the budget.
  • Use different times and places. Be creative in how, where, and when the budget information sessions are held. Different groups meet at different times, so leverage those meetings. Use different people to do the talking, too – it shouldn’t ever be the same person doing all the speaking.
  • TELL STORIES – budgets are never about numbers. Budgets are ALWAYS about people. So, when you make the presentations, tell the stories (beginning, middle and end) about how people will be changed and helped because of the money given to the church.

 

10. How do you anticipate and prepare for the questions will you get?

You can’t. But you can be prepared by knowing as much about the budget, its process, and its leaders as possible. Don’t spend time trying to anticipate questions; spend time with people (especially young leaders) so they’ll understand the goals of the church and how the budget plans to work toward those goals.

When you have Q&A times with the church, don’t let just one person handle all the questions. Ask all committee leaders (missions, worship, youth, education, etc.), all Finance Committee members, all staff ministers, and other key leaders to come to the platform.

  • The church will then get to see who made the decisions regarding the budget. Usually, those are a score or more of trusted leaders, not just one committee working in isolation.
  • The people on the platform can best answer detailed questions about their respective area. The Budget Committee leader may not know why the guest musician budget line has that figure, but someone else does.
Filed Under: budget, church finances, church financial statements Tagged: , ,

Church Budgets: Top 10 List (part 1 of 2)

Posted on February 18, 2014 Written by

This week I am posting #1-#5 of the Top 10 considerations regarding church budgets. Stay tuned for the remainder of the list next week.

 

1. Why do you need a budget?

A budget is a tool – nothing more.

  • It is a yardstick to measure your progress toward planned goals.
  • The planned goals are the most important aspect of the budget, not the financial numbers.
  • The financial numbers are ONE indicator of how well the church is doing toward achieving these goals, but it is not the ONLY measurement.

Budgets must be developed holistically

What do we want to accomplish in our youth ministry, worship area, building maintenance, staffing needs, etc.?

How are we going to reach these goals using our resources?

  • People: staff, volunteers, and paid vendors
  • Money: from all sources, not just budget
  • Time: when do we plan to achieve these goals

Ideally, budgets look forward over several years, not just the next few months. The Budget Committee should always be looking at how the church’s finances need to be structured over the next several years.

 

2. What is the timeline for developing a church budget?

There are several elements to the process and each one has its own timeline. Some churches use all these elements and some use only a few. Determine what works best in your specific church’s culture.

Theme development

  • Churches that use a theme typically have a team working on this 7-8 months before the beginning of the new fiscal year.
  • Some churches have themes centered on the core aspects of church (worship, fellowship, missions, member care, and education) and promote each one every five years. This helps guide theme development.
  • The committee usually selects a verse, logo, tag line, and music which will help focus the church during the budget emphasis. Churches with a fiscal calendar year often use October as the budget emphasis time, and theme development is in April and May.

Committee budget work

  • Committees need 2-3 months to find times to meet and come up with goals (numeric and intangible) for their ministry areas for the few years.
  • Committees should have a leader (staff or lay member) who can make a presentation, if necessary, to the Budget Team.
  • Committee work is done 4-6 months before the new fiscal year.

Budget Committee coordination

  • It is up to the Budget Committee (sometimes a subset of the Finance Committee) to gather the info from the various working committees and compile it into a comprehensive budget.
  • Some Budget Committees want representatives from the various teams to make presentations to the Budget Committee so that they’ll more fully understand the why behind each of the numbers. These presentations can help this Budget Committee to be the most fully informed group of lay leaders about the wide variety of work being done by the church.
  • Budget Committee work is done 3-4 months before the new fiscal year.

Church-wide presentations and vote

  • Some churches have a month-long budget or stewardship emphasis to help people understand what makes up all these figures and why each person in the church is important to make all of it happen. Many churches will use every form of communication possible to inform members and get them involved.
  • If the church is on the fiscal calendar year, then these presentations are in October with a vote by mid-November (before Thanksgiving) so as not  to encroach on Advent.
  • Typically, this work is done 2-3 months before the new fiscal year.

Follow up

This is a continuous process during the fiscal year. People need to be reminded of how their money is being used and the good that it is doing. Take advantage of Sunday morning offering times to tell the stories of how lives are being changed due to the generosity of church donors.

 

3. Who needs to be involved in the process?

Early stages

  • In the early development of a budget, you need the informed leadership working on the budget. This usually means the informed leadership in each budget area meets to plan their goals and determine the resources they need to achieve those plans.
  • The Budget Committee (or designated sub-committee of the Finance Committee) does not have jurisdiction over the goals in the various ministry areas because they are not as fully informed about those areas as the respective committees are.

Middle stages

  • At some point in the development process, the many ministry committees should invite feedback from the people invested in each area.
  • For example, the Missions Committee should tell people interested in missions what the plans are and then ask them for their ideas about what is needed on future endeavors. Committees must never create budgets in a vacuum – seek input first from the leadership and then from the followship. The “wisdom of the crowds” is valid and insightful.

Later stages

Finally, the different components of the budget will become public and that is when as many people as possible should be aware of the budget (at a minimum) and invested in it. The more people that are “buying into” the budget and what it wants to do, the more successful all the areas of the budget will be.

 

4. Should you use pledge cards?

Some churches have used pledge cards for decades and will continue to use them. Some churches stopped using them; some of those members regret that decision and others do not.

Pledge cards have several purposes:

  • As a tool in setting the budget
  • As a way to challenge people to give more
  • To track how much people have given

Increasingly, younger generations do not want to commit to a figure they’ll give. They will give – and give generously – but they just don’t want to state how much they’ll give. There are so many variables in life (debts for school, home, car, credit card; kids; trips; business and home; etc.) that are hard to plan for.

If you use pledge cards, then have a clear, concise, consistent reason WHY you are using them.

  • Pledge cards should never be used as a tool to bully people into committing or giving – too often that is what pledge cards devolve to.
  • Like ALL aspects of church finances, pledge cards must be used in a positive way, such as encouraging people to be more generous (with their prayers, their time given to church activities, and their finances).

 

5. How do you estimate your annual income?

This is one of the hardest numbers to determine in financial budgeting.

Fiscal prudence suggests one or a combination of the following. A church should be able to do better in the future than it has in the past.

  • Use the past 12 months’ rolling figure of actual receipts
  • Use 90% of the past 12 months’ rolling figure of actual receipts
  • Use a spreadsheet formula to forecast the next 12 months’ income

These formulas are intentionally conservative. The church can use any “excess” for capital needs, additional staffing or programming needs, and/or to establish and replenish reserves.
Be financially conservative in your projections. You won’t regret it.

 

Filed Under: budget, church administration, church finances, church financial statements, leadership, wisdom Tagged: , , , , ,

Olive Trees

Posted on December 10, 2013 Written by

Olive trees are rather amazing. I’ve never worked in an olive grove, but I did grow up in Spain, which has about 40 million olive trees. I couldn’t help but learn about olive trees as I drove across the country and saw olive trees from one horizon to the other.

There is a saying that when a farmer plants an olive seedling, he is planting it for his children. Olive trees mature slowly; an olive tree is 25 years old before it bears fruit. Not many farmers today can wait 25 years for a crop to come in.

But the olive tree is also amazing for its longevity. An olive tree will live about 1, 000 years, and some are even 2, 000 years old. So once an olive tree is 25 years old and begins to produce olives, it will continue to do so for the next 1,000 years if it is cared for properly.

Olives are harvested in a rather harsh fashion. Cloths are spread out under the tree and the branches are beaten with long poles. A hail of olives falls on the cloths. The cloths are gathered, and the olives are poured into buckets. These olives are used for food, pressed to make olive oil, or planted for another generation’s benefit. The olive tree doesn’t grow tall; it is smallish. Its trunk is not straight, so its wood is not good for construction. The olive tree is a humble tree that in maturity gives results for centuries to come.

It may be a stretch, but I’d like to compare church buildings to the olive tree. Typically they are not grandiose architectural masterpieces but are functional. They take many years to plan and build, but they will be with us for generations to come. Every generation or so, churches add a structure—knowing the primary beneficiaries will be their children and grandchildren. And, at some point in the unknown future, a decision will be made to tear down the building that the current generation labored so hard to construct.

Church buildings should be seen as investments:

  • First is the money that is raised to pay for the land and the building itself. It usually takes years to raise the money and pay off the principal and interest on the construction debt. If the generation doesn’t pay off the debt, then we saddle the next generation with debt plus the expense of maintaining the facility.
  • The second and greatest investment we make in our new building is people, especially our children. The building is a tool, not the goal; the measuring stick is how many lives the building affects for the Kingdom. We must ensure that the classrooms have the best teachers and leaders and they have all the training and resources they need to do the volunteer job they’ve been asked to do. The result will be people who leave the structures each day to go into the world knowing and sharing the love of God with each and every person they meet.

As we invest our money and our lives in church buildings, only God knows the fruit it will bear over the next several generations, because we planted a seed.

Lead On!

Steve

Filed Under: church administration, church finances, future, strategy Tagged: , , ,

High-capacity donors

Posted on November 26, 2013 Written by

High-capacity donors are people who are just that: individuals with the ability to give generously and in large amounts of money. They can be very generous when they want to and to whom they want. They are very judicious in who is the recipient of their largess. They know that money is essentially a magnifying glass – money gives a person the ability to be either more generous or stingier.

My experience with wealthy people is that almost all of them are generous with causes which appeal to them and which they feel will make a difference. They don’t give money out to bleeding hearts; they do their research to ensure that their gifts really will be leveraged to improve the quality of life of people and their community.

I’ve known quite a few high-capacity donors and all of them have one thing in common: they have wealth. Some earned their wealth, while others inherited it. Some have come into sudden money and others had it from the day they were born and thus don’t know anything different. Almost all of them have parents or grandparents (the originators of the family fortune) who want their offspring to learn generosity. They don’t want stingy family members. The elder generation knows the value of sharing money and the joy it brings to the donors and to the recipients.

The church in general is not “developing” these donors. In its haste to ensure that the church treats all people the same, many churches unintentionally do things that push away high-capacity donors. Some donors have rare skills which the church could use but for fear of elevating them, the church does not use their talents.

I challenge the church to find ways to cultivate all high-capacity donors. These individuals and families truly want to give back. Churches become poorer (in many ways) by not accepting the gifts (both monetary and talents) of high-net-worth individuals. The Body of Christ is made up of different people with different skills, and the Body of Christ needs ALL members doing what makes them unique—so that TOGETHER we can all excel in doing what God requires of us.

Lead On!

Steve

 

Filed Under: church finances, generosity Tagged: ,

Standing Rubble (part 1)

Posted on August 6, 2013 Written by

David, King of Israel from (1,000 to 960 BC) really, really wanted to build the temple but God said that David had too much blood on his hands from his battles with the Philistines. Instead, the job was given to his son, Solomon, who built an incredibly beautiful temple which lasted several hundred years until it was destroyed in 587 BC when Nebuchadnezzar’s armies invaded.

A few dozen years before the birth of Jesus, Herod’s Temple was finished until it was destroyed by the Romans in 70 AD after a Jewish uprising (same revolt as Masada). Herod’s Temple was the very one that Jesus lived in for 3 days as a young boy, the one that he visited numerous times, and the one that is commented on in Matthew 24:1-2:

As Jesus was leaving the Temple grounds, his disciples pointed out to him the various Temple buildings. But he responded, “Do you see all these buildings? I tell you the truth, they will be completely demolished. Not one stone will be left on top of another!”

The Jerusalem Church was led by James, the brother of Jesus. This was the very first center of Christian community and is sometimes described as the “mother of all Christian churches.” When the Romans invaded Jerusalem, Christians (and Jews) scattered throughout the world, taking their faith with them and spreading the Gospel. No one knows where that church in Jerusalem was located, and no trace of it is found today.

These are arguably the three most important structures in the history of ancient Judaism and early Christianity. There are many, many more recently constructed buildings of note (St. Peter’s in Rome, St. Paul’s in London, Haggia Sofia in Istanbul – originally a church, and countless temples) but none of these have the pedigree of Solomon’s Temple, Herod’s Temple, and the First Church of Jerusalem.

So, why am I writing about these? That’s my next post.

Lead On!

Steve

Filed Under: buildings, church administration, church finances, facilities Tagged: , , ,

1 Bank Account

Posted on July 16, 2013 Written by

The rule of thumb is that a church needs just one bank account for its financial needs. If you have more than one account, you are incurring additional bank charges, taking up staff time to transfer funds and reconcile bank accounts, and constantly tracking all the changes and balances.

I recognize the concern over the FDIC cap of $250,000 but there is a way around that ceiling; see this post for that info. The CDARS program is a legal tool which can insure up to $50 million, and if you have even more than $1 million in a bank account, you should consider investing that in a way that has better returns than a bank.

I’ve seen organizations that didn’t have a cash flow problem, but prior church leaders were leery of exceeding the FDIC cap so they opened bank accounts—lots of them. One had nine accounts and another had an astounding 20 bank accounts (including three that were never on any financial statement). When one organization had an audit, the auditors spent scores of hours tracking funds flowing from one account to another, and that increased the audit cost by tens of thousands of dollars.

Another concern with multiple accounts is that it can make it easier to hide malfeasance by an employee. Tracking so many accounts is hard and if one is omitted from a financial statement, then after a while that account can be tapped by an employee for personal purposes. If you only have one bank account, it is pretty hard to leave it off the balance sheet!

I strongly encourage all organizations to have just one bank account. However, there are times when a church needs more than one account. When a church has cash flow issues, it struggles to make its regular payments, and its leadership doesn’t have the fiscal control to ensure they don’t spend too much, then there should be a second account. That second account will receive transfers from the main account and hold funds until those funds are needed for payroll, debt service, or other critical expenses.

Unless you have an incredibly good reason to have more than one account, please close all your excess accounts, save the church some money and time, and make your financial reporting more efficient and transparent.

Lead On!

Steve

Filed Under: budget, church finances, church financial statements Tagged: , ,

Church Debt #2

Posted on July 2, 2013 Written by

My previous post was a primer on church debt. In this post, I want to focus on the interest rates that churches pay. There is a simple way for churches to pay less in interest and use that money for staffing, buildings, programming, or additional payments on the principal.

First, indicators that you should refinance:

  • If a church has an interest rate that is more than 1% over the current market rate, then refinance
  • If the church’s current terms are less than 12 months from renewal, then refinance
  • If the church needs additional capital for a project AND the church’s debt-to-budget ratio is less than 200%, then refinance and include the additional amount in the new mortgage

One of the biggest questions facing church finance committees on the subject of refinancing is whether to get a fixed or floating rate interest note.

  • A fixed-interest-rate note is just that: for the life of the loan, you’ll always pay the same interest rate. It is easy to budget for this and there is a measure of certainty and even security in knowing exactly what the monthly mortgage bill will be. This is a good tool for small amounts.
  • A floating-interest-rate note is pegged to one of two interest rates: US Prime Rate (set by the US Federal Reserve and major US banks) and LIBOR (an acronym for the London Inter-Bank Offered Rate and is set in London as a basis for international loans). Floating rates can be either higher or lower than fixed rates – it is all dependent on the financial world. note that many banks will allow floating rates to be changed to a fixed rate at some time during the five year period.

No one knows what the interest rates will do over the next five years, yet that is exactly what finance committees are trying to guess. Do they lock in a fixed rate for five years to have a stable figure for the budget, or do they try to pay less with a floating rate knowing that if they’re wrong, the floating rate could go sky high before they can lock it in? Here’s my suggestion as to which interest rate tool a church should use: BOTH.

Instead of trying to guess either/or, do both/and. The church should take its current loan and get the bank to finance half in a fixed-rate note and half in a floating-rate note. Each month the church will make its regular principal and interest payments from its budget and capital campaign receipts. Then, as the church receives additional gifts toward the debt, the church will make additional principal payments against whichever note has the highest interest rate (fixed or floating). This is important – you want to first knock down the debt of whatever note has the highest interest rate. This may change during the course of the debt: the floating rate may go higher than the fixed or vice versa, but you always want to pay down whichever note has the highest rate, not the one with the highest debt.

This is a simple concept which may take your bank a while to accept, because it is not to their advantage. But this is God’s money – use it to the church’s advantage!

Interest Rate Hedges or Insurance: The financial world has come up with many tools to decrease the perceived risk in interest rates. My experience is that these are usually balanced in favor of the bank and they are not worth the extra cost to the church.

 

Lead On!

Steve

Filed Under: budget, church administration, church finances Tagged: , ,

Church Debt #1

Posted on June 25, 2013 Written by

Many churches have sizable amounts of debt. Too often this debt hampers the church from paying its staff properly, maintaining its buildings adequately, or funding its programming sufficiently. Let me be clear: I despise church debt and encourage every church to do everything it can to get out of debt ASAP. Church debt is nothing more than giving money to a bank when the money should go elsewhere.

 

That said, I understand the reason for debt: to get some money up front to enable the church to construct facilities which will draw in people who can then provide additional receipts to pay for the staffing, buildings, programming, and debt.

 

I also understand that banks like to loan money, and they’ll tell a church that the debt limit is three times their annual income (much like a homeowner’s mortgage). I disagree: anything beyond two times will hamstring the church financially for years to come (much like a homeowner’s mortgage!). If your church’s debt is over 200% of your annual budget, you need to have a capital campaign to eliminate your debt as soon as possible or at least reduce it to a manageable level. Please pay attention to your debt.

 

All debt has three components:

  1. Time: Church debt is commercial debt in that it almost always has a five-year repayment time period. It is not like a homeowners’ mortgage which lasts 30 years but instead, church notes are a five-year note with a “balloon” at the end. The balloon means that the bank knows you won’t pay it all off during the note’s time limit of 5 years, so that means you’ll pay it all off in a balloon payment at the end of the time period OR you’ll refinance the debt (the latter is almost always the case). However, the bank bases its fee schedule on a 30-year note to keep the monthly mortgage payment low enough for the church to pay.
  2. Amount: This varies from church to church based on the need. I’ve seen churches do foolish things such as giving in to the desire to obtain a short-lived item and then putting that cost into the mortgage. For instance, some churches want a van so badly they’ll take that expense and add it to the mortgage, which means they’ll pay for that van for 30 years—about 20 years longer than the van will last. Please make sure you only finance things that will last at least the life of the mortgage.
  3. Rate: See my next post on this subject.

 

Church bonds: I’ve never been part of a church that floated bonds. However, I’ve seen churches use a bond issuance very successfully. This is a creative way to finance a church’s capital needs. Most of the bondholders will be the church members who will give money to the church to pay off the bonds. Occasionally someone from outside the church will buy a church bond.

 

It does take some money up front to work with the bankers and lawyers to get all the legal work done so ensure that you have some capital before you start down this path. Some churches encourage bondholders to gift their bonds back to the church during the course of the note. For instance, sometime people give a bond to the church at Christmas: they’ve “forgiven” the debt, so the church no longer owes principal and interest on that specific bond. Throughout the life of the bond, the church will pay out interest to the bondholders – the interest is paid from funds raised and gifted by members. Also, bonds are bought back by the church as the church has funds available.

Lead On!

Steve

Filed Under: budget, church administration, church finances Tagged: , ,
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