How To Conduct Church Financial Management + Best Practices
If you’re reading this, you’re probably a pastor feeling overwhelmed about financial management within your church. Maybe you’re considering hiring a finance professional, but maybe this costs more money than you want to spend, especially if you’re a small church without a large admin team.
You’re not alone. I’m Lexie Schmidt, and I’ve been involved at all levels of church volunteering and management. My experience in ministry can help guide you through the common pitfalls of managing your church’s financial health.
Managing your church’s finances doesn’t have to be as complicated as it seems. Whether you’re trying to improve current practices or starting a new church plant, these tips and resources will help you get started.
- How To Manage Your Church’s Finances
- Special Tax Considerations For Churches
- Best Practices For Church Financial Management
How To Manage Your Church’s Finances
In many ways, church finance is like finance for any company: the goal is for funds to be greater than expenses. But rather than selling a product to earn money, churches get most of their funds through individual donations—about 81 percent, according to a recent national study by Lake Institute on Faith & Giving. This categorizes them as a nonprofit, along with other requirements such as serving the public, and using funds towards a mission or cause.
One common misconception is that a nonprofit organization can’t make, or hold onto, money year-over-year. Just like for-profit companies, nonprofits are expected to maintain cash reserves for emergencies and build those reserves in anticipation for large projects and expenditures, such as renovations, upgrades, and other projects.
How To Create A Church Budget
The biggest part of financial management is creating and maintaining a budget. A budget tells you how much you can spend by tracking how much you have coming in. Making a budget gives you your greatest tool in being an effective steward of your church’s finances.
Budgeting can be a large task in practice but includes two main parts:
Part 1: Evaluating Current Financial Health
Your initial evaluation is vital to good bookkeeping, but it can be broken into simple steps.
- Using past records, you can estimate what funds and expenses you will have for the upcoming year.
- Will you be in debt, or come close? If so, what is costing you the most? What is the greatest source of funds, and can a simple fundraiser cover the shortfall? Do you need a short-term or long-term loan to hold you over?
- Ideally, you want to be able to cover your expenses and have money left over to save. If your tithes and offerings are not enough, consider whether new programs or events can generate the revenue you need.
- If your church is running any expensive programs, they may need to be put on hold until the financial situation is more stable. This is always the hardest part. Sometimes, the programs we hold most dear are the ones that cost the most. Be willing to cut them until your finances improve.
Part 2: Determining Short- And Long-Term Goals
Financial goals should be specific and actionable. If you want to increase donations for the next year, aim for a certain percentage. If there’s a trip or project you want to fund, figure out how much it will cost. Compare these goals to your budget and see how much money can be allocated to fundraising and campaigning.
This, too, can be simplified into a few, easy steps.
- Compare your past revenue and expenditures over the past several years. Generally, five years is enough. Use those figures to determine your percentage of growth or loss year-over-year.
- Take those percentages and project your possible finances over the next five years. Look for shortfalls and overages in your projections.
- If you have shortfalls over the next year or two, start identifying immediate remedies like fundraising through church events or small business loans in emergency situations. Shortfalls toward the end of your projections can be fixed by setting short-term goals for growth through outreach and community involvement.
- Conversely, if you find yourself with extra finances, you should set short-term goals of saving a certain percentage, usually 10-15% of income, for emergencies, and begin to identify your areas of greatest need for church projects.
- Long-term goals involve what comes after those five-year projections. While a short-term goal may involve upgrading your HVAC system, a long-term goal might be purchasing or building a new sanctuary. Think 10-20 years into the future as you start a savings plan or other financial concerns beyond your current needs.
Special Tax Considerations For Churches
Like other nonprofits, most of your funds will come from tax-exempt donations. Tax-exempt status comes with some rules:
- the organization must primarily be used for religious or charitable work
- the organization cannot promote any political agenda
- the net earnings do not primarily benefit a single person
- the organization’s agenda must not be illegal
Churches are not exempt from filing annual tax information returns. The specific guidelines can be found in IRS Publication 1828 where you can learn the ins and outs of US church taxes. Canada is slightly different, though. Religious charities, the legal term for all religious organizations in Canada, do not have to fill out the publicly accessible portion of the tax information return. They must still complete the government-accessible portion.
In the US, though, tax audits are nearly impossible for the IRS to initiate without evidence of malfeasance from a whistleblower, and those audits can only happen every 5 years unless malfeasance is found in an audit. This means that the IRS can usually only see a church’s books through their employees and what is reported on the tax forms. The IRS is, by law, unable to help churches track their finances.
Best Practices For Church Financial Management
Church finances can sometimes be seen as the ugly duckling of our business. Just like the ugly duckling, though, proper budgeting and management can turn your finances into a beautiful swan. Here are some of the best practices for growing a healthy budget.
Structuring Financial Oversight
Without government help tracking financial information, churches have to be vigilant about monitoring funds and putting safeguards in place to prevent losses. You can do this through a structure of checks and balances. In most churches, finances can be handled with a combination of the following elements.
- The board
- The treasurer
- The church finance committee
- The audit committee
Your church’s board of trustees (or board of directors) is ultimately responsible for financial oversight, but normal management tasks will be delegated to a finance committee chaired by the church treasurer.
Ideally, your treasurer and people on the finance committee will have relevant experience with budgeting and accounting. At the very least, however, look for people who have a gift for numbers and handling money.
The finance committee’s duties include:
- Creating policies
- Managing funds
- Keeping financial records
This means they hold almost all control over the church’s finances. The audit committee acts as a power check—they review financial statements for accuracy and make sure that policies are actually being followed.
Improving Financial Stewardship
Faithful stewardship is a congregation-wide practice that should be implemented in every area of life, but financial stewardship is the finance committee’s responsibility. Ensuring stewardship of a church’s finances means using internal controls to track and monitor funds.
Some common methods for monitoring your finances are:
- Using church management software as outlined in our next section.
- Keeping good books by recording all income and expenses promptly
- Ensure that cash from offerings pass through as few hands as possible
- Always pay with checks or bank cards linked to the church’s account
- Secure the passwords to your church’s banking and business accounts
By being careful about who has access to your church’s money, both physically and digitally, you can more easily identify where funds have been misplaced or misused.
We have already talked about keeping and reviewing financial records as a practice among board and committee members, but most funds originate from church members. This is where stewardship is often overlooked.
Donations are most vulnerable at collection, because they haven’t been included in reports yet. Luckily, there are many easy ways to keep track of them:
- Have more than one person present when counting offerings
- Store offerings securely
- Provide envelopes for cash offerings
- Use a secure platform for digital offerings
- Encourage recurring pay
These measures not only protect offerings from theft, but some can actually increase donations. Many people want to donate but forget or don’t have cash, so you can offer options like digital giving or automatic recurring payments to members of the congregation who might be interested.
PS: Learn how to create a personalized church donation thank you letter here.
Use Church Management Software
Keeping track of all those numbers might be difficult, but the right church management software can help. Church management software is designed to make administration more efficient by putting several tools in one place.
While specific software programs have different specialties, generally they include:
- Attendance and membership trackers
- Financial management tools
- Communication aids
- Event and volunteer organizers
- Website builders
You might have to shop around, but investing in the right software is an act of financial stewardship on its own. For finance-specific software, try church finance software or church accounting software.
Get Started With Church Financial Management
Still having trouble? Whether your church’s finances are just a mess or starting from scratch with a church plant sounds too overwhelming, it might be time to consider hiring a financial consultant or accountant. Keep an eye out for one of the many specifically Christian-based organizations dedicated to helping churches too.
I’m Lexie, and I hope you’ve learned something as you have read this guide. If you’ve implemented successful financial management tactics at your church, tell us about it! And if you’re starting a new church, be sure to check out our article on other problems that can arise in church planting.
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