budget (part two)
In a previous blog post, I talked about what most churches get wrong about having a balanced budget. For this week I want to focus more practically on how to budget.
Before jumping in, it is important to talk about the goal of a budget. In Church Finance: The Church Leader’s Guide to Financial Operations, Michael Batts describes a budget as “[representing] the financial blueprint for carrying out a church’s ministry plan for a particular period of time” (1). In Smart Church Finances: A Pastor’s Guide to Budgets, Spreadsheets, and Other Things You Didn’t Learn in Seminary, George Hillman Jr. and John Reece say, “a budget simply defines your church’s resources (financial, facilities, and personnel) and coordinates how they’re used across your church’s ministries” (57).
However, budgeting is one of the most important administrative functions of the church; not only is budgeting about stewardship and accountability for the dollars and cents, budgeting is ministry. Hillman and Reece say, “the budget translates your church’s vision, mission, and strategy, into actual ministry” (57). There is an opportunity (and obligation) to serve the congregation and the community with every dollar the church receives. Therefore, the goal for every church budget is to maximize the impact of each dollar your church expects to receive (i.e., how can I spend money to build the Kingdom of God as much as possible?)
Based on my reading, there are three basic budget approaches: incremental, financial position, and zero-based.
Incremental - According to Hillman and Reece, “a common practice in budgeting is to set the allocated amount of money for all the programs to be the same as the previous year, with only a minimal increase to account for inflation or other additional costs” (58). In (Ad)Ministry: The Nuts and Bolts of Church Administration, Tom Tumblin, recognizes a similar temptation to “build next year’s spending plan by adding 2 or 3 percent to this year’s budget line items” (53). However, nearly every book I have read on church finance, advises against the practice of incremental budgeting. Tumblin argues the “incremental approach fails to assess emerging needs. It assumes programs or ministries continue to be vital forever and the community being served never changes” (53). Hillman and Reece note how an incremental approach results in a “use it or lose it” approach that is not “faithful stewardship of the resources but instead unnecessary spending only for the purposes of maintaining the same budget level next year” (58). The main criticism of the incremental approach is what you have done in the past might not be best for the organization.
Financial position - In contrast to the incremental method, Batts recommends “determining the church’s desired or targeted financial position (liquidity, reserves, debt levels, and so on) and the desired timetable for achieving it” (8). Batts emphasizes that the financial position approach “[requires] intentional effort…to spend less than what the church receives in cash revenues” (8). It is much like household budgeting where a family says, “we need to stop eating at restaurants for a few months to save money for a down-payment on a house, a car, or major purchase.” The advantages of the financial position approach is the long-term thinking and planning required to save for strategic initiatives. However, churches who rely on a financial position approach can become overly focused on achieving their financial goals and lose sight of short-term immediate ministry opportunities and/or become easily overwhelmed when there are changes to the budget.
Zero-based - Majority of authors recommend a zero-based budget approach that “starts with a blank sheet of paper…and determines what specific activities should be conducted in order to carry out the church’s mission and what those activities will cost” (Batts 3). According to Tumblin, the advantage of this approach rather than the incremental or financial position strategy, is that it forces the budget to “[begin and end] with the strategic plan and mission of the organization” (53). By building the budget from the ground up each year, churches are forced to make decisions about which activities, programs, events, etc., are best aligned to the mission of the church. While a zero-based budget sounds great in theory starting from scratch every year is time consuming and for many churches impractical.
Each budgeting approach has pros and cons. The incremental approach is simple and easy, but does not account for change. The financial position approach is future looking, but can be overly rigid. The zero-based approach helps organizations align budget to mission, but is time consuming.
I do not think there is one right approach to budgeting. Each church is unique and every year in the life of a church is a little different which may require a different approach.
So rather than say specifically how to budget, I want to focus on three fundamental considerations for the budgeting process taken from the business world. Specifically, the church faces similar challenges to a business around growth, change, and governance. Businesses, particularly successful ones, consider these three things in the budgeting process.
The budgeting process needs to account for growth (or decline). Congregations change over time; there will be people who leave the congregation move away, pass away, or leave the church for any number of reasons and (we hope) there will be people who join the congregation. As congregations change, the needs and gifting of the congregation change too. When budgeting it is important to consider how the church is growing or shrinking and how the church will invest in growth.
The budgeting process needs to account for change. Change is a constant; the congregation is changing and the community the church serves is changing too. As the needs of the congregation and the community change, the activities, programs, events, etc., that may have worked at one time may not work anymore so some budget items may no longer be needed while new items need to be added. For instance, what is happening in the global, U.S., or local economy? Maybe a prominent business closed down or just opened up? Or a new low-income housing development is being built near the church? As churches build a budget, it is necessary to consider what is changing in the congregation and community. As I said before, healthy churches change; unhealthy churches do not change.
The budgeting process requires transparency. Although the budget impacts every aspect of church life and every person in the church, far too often the budgeting process lacks transparency. As noted by Tumblin, “the budget is too important to negotiate among a closed group - for examples, the finance committee - behind closed doors” (54). Transparency is important in two areas: success criteria and inclusivity. First, there needs to be some assessment of whether activities, programs, events, etc. are working well and those parameters should be clearly communicated with the congregation. Second, Tumblin notes, “an organization’s spending plan has its best effect when its creation is a shared experience. All of the key stakeholders deserve to be part of the discussion” (54). Churches need more transparency in the budgeting process; there need to be clear success metrics and there needs to be a diverse group of stakeholders participating in the discussion.
An alternative approach
On a practical level, here is an exercise I found to be helpful. It is called: Start, Stop, Continue.
The idea is simple: What new activities, programs, events, etc. do we want to start doing? What do we want to stop doing? And what do we want to continue doing? The advantages of this exercise are it does not require starting from scratch, it accounts for growth, change, and governance, and it focuses on ministry rather than on money. Rather than starting from a blank-page like the zero-based budget approach, it allows organizations to build from the existing budget. However, by beginning the exercise with ‘start’, it forces organizations to consider growth opportunities before agreeing to fund existing ministries (thus, avoiding the pitfall of the incremental approach). Additionally, throughout this exercise leaders are continually challenged to provide good reasoning for their decision-making. It is not enough to simply say, “I want to start doing X and stop doing Y;” there should be conversation about why those decisions are being made with clear reasons (metrics, data, etc.) for why something is starting, stopping, or being continued. Lastly, too often using an incremental or financial position approach focuses the conversation on money (cost, affordability, etc.) before ministry (where is God calling us to meet the need our church and community). The ‘start, stop, continue’ exercise, similar to the zero-based approach, focuses on ministry before money.
To summarize, as church leaders it is important to recognize the importance of the budget. It is one of the most foundational administrative functions for any organization, especially the church. A good budget, and a good budgeting process, enables good ministry. Tumblin summarizes it well saying, “as the context shifts, with new people entering and others leaving, ministry opportunities change…. the critical budgeting question is, given where the Spirit has called us and is leading us, how shall we invest our assets in ministry next year? The question is not necessarily, What can we afford? Nor is it, What do we want to do? Rather, through careful prayer and discernment, determine what God is asking of the congregation over the next twelve to eighteen months” (53-54).
After all, budgeting is ministry.
References
Church Finance: The Church Leader’s Guide to Financial Operations by Michael Batts
(Ad)ministry: The Nuts and Bolts of Church Administration by Thomas Tumblin
