Pastor, Here’s How to Develop an Effective Church Budget.
Healthy Finances Require Discipline: Managing church finances without a budget is difficult and can seem chaotic like herding cats. Establishing a budget provides the necessary discipline.
Budgets Prevent Financial Headaches: Crafting a budget helps prevent financial headaches by providing a clear financial plan and direction for the church community.
Budgets Bring Clarity: Having a budget offers clarity, ensuring that church finances are managed efficiently, avoiding confusion and potential financial disasters.
Budgets Streamline Finances: Creating a budget transforms chaotic financial management into a streamlined process, leading to better financial health and reduced stress for church leaders.
Not having a church budget is like trying to herd a dozen cats on a unicycle —chaotic, ridiculous to watch, and ultimately headed for disaster.
That’s not how we want your church finances to go.
From one pastor to another: the sooner you create a budget, the fewer financial headaches you'll experience, the more clarity you'll have, and the more time (and money) will be freed up to spend on your mission.
The 'just right' church giving software tool can work wonders for your church's financial health, but this article will give you a solid foundation on church budgeting.
Together, we'll answer the following questions:
- Why is a church budget important?
- What are the key components of a church budget?
- What are the necessary steps to create a church budget?
Dive in! This is important stuff.
Our church budget reminds me to trust God (despite our fear) with our church's current and future finances.
Joshua Gordon
Why Is A Church Budget Important?
The point of a budget is to provide a structured plan for managing money entrusted to you and your church. Careful planning is important, and that’s why a budget can be a vital tool for effective financial management and establishing a financially healthy church.
Budgeting is Biblical.
Creating and maintaining a budget helps us honor God and use His resources wisely. Budgeting also helps your church make a plan and spend within its means, reducing uncertainty around financial priorities.
When you create a budget, you tell the money where to go instead of guessing or hoping it works out.
- Proverbs emphasizes the importance of careful planning rather than playing fast and loose: "The plans of the diligent certainly lead to advantage, but everyone who is in a hurry certainly comes to poverty." Proverbs 21:5
- Jesus himself defends the importance of financial planning in Luke 14:28-30, “For which one of you, when he wants to build a tower, does not first sit down and calculate the cost to see if he has enough to complete it? Otherwise, when he has laid a foundation and is not able to finish, all who are watching it will begin to ridicule him, saying, ‘This person began to build and was not able to finish!"
- How church leaders and pastors practice stewardship of church finances is critical. 1 Corinthians 4:2 states, "Moreover, it is required of stewards that they be found trustworthy.
- Debt is easier to avoid with a good budget. Proverbs 22:7 warns, "The rich rules over the poor, and the borrower is the slave of the lender."
- Generosity is a crucial (and often overlooked) aspect of church budgeting. 2 Corinthians 9:6-7 says, "The point is this: whoever sows sparingly will also reap sparingly, and whoever sows bountifully will also reap bountifully. Each one must give as he has decided in his heart, not reluctantly or under compulsion, for God loves a cheerful giver."
Budgeting vs Financial Planning
Simply put, budgeting is focused on managing today’s money wisely, while financial planning is focused on preparing for tomorrow’s needs and opportunities. Both are essential.
While budgeting and financial planning are crucial to your church's financial health, each serves a different purpose.
- Budgeting focuses on managing day-to-day spending, whereas financial planning focuses on future growth and sustainability.
- Budgeting is a more specific and detailed breakdown of expected income and expenses, emphasizing tracking and managing spending.
- A budget is a clear summary of the church's income and expenses, one year at a time (usually).
Financial planning provides a framework for an organization’s financial objectives, typically for the next three to five years. Think of it as a ‘where do we want to be’ plan.
Financial planning is a comprehensive strategy that encompasses budgeting while also considering debt management, savings, and investments.
What Types Of Church Budgets Could I Use?
There are several different kinds of budgets, each with its own objectives and functionality. In my experience, churches often use a line-item budget or a zero-based budget.
- With a line-item budget, you can take the previous fiscal year’s budget and make the necessary tweaks to create the next annual budget.
- With a zero-based budget, your focus shifts to spending only what’s coming in.
Let’s look at a few different budgets churches and other non-profits tend to use. The first three are more widely used.
Using a Line Item Budget
This budget lists all expected income and expenses in detailed categories based on the previous year’s budget. This is often the simplest type of budget to prepare, ideal for small—to mid-sized churches.
- Use: Best for day-to-day financial management and tracking specific expenses.
- Example: Separate lines for salaries, utilities, youth ministry, and outreach programs.
Using a Zero-Based Budget
This budget starts from zero each year and requires justification for every expense. Unlike traditional budgets, this type can help a church ensure that every dollar is spent purposefully.
- Use: Ensures funds are used efficiently, as every expenditure must be justified.
- Example: Every ministry must explain and justify its requested budget for the new year.
Using a Program-Based Budget
As the name implies, this type of budget allocates funds based on specific church programs and ministries. It also helps evaluate the effectiveness of the program by providing a transparent way to evaluate its impact.
- Use: Helps prioritize funding for different ministries and track their financial needs.
- Example: Separate budgets for children’s ministry, worship team, and community outreach.
Less Common Budget Types:
An Incremental Budget is based on the previous year's budget, incremental budgeting adjusts for changes and new needs. In many ways, it is considered the original type of budget. As the name implies, it takes the current budget/performance and adds incrementally to it for the new budget period.
- Use: Simplifies budgeting by using past data and making incremental changes.
- Example: Increasing last year's youth ministry budget by a percentage to account for growth
A Capital-Based Budget focuses on investments and large projects. This type of budget is best suited for a long-term investment in assets like buildings or equipment.
- Use: Manages funding for major expenditures like building renovations or new facilities.
- Example: Budgeting for a new church building or major repair work.
A Mission-Based Budget allocates funds based on church mission and strategic priorities. This budget helps ensure that your funds are used to advance your church’s mission and long-term objectives.
- Use: Ensures that spending aligns with the overall mission and vision.
- Example: Prioritizing funds for community outreach based on the church mission statement.
What Type of Budget Do You Need?
Determining which type of budget your church needs involves assessing your church's unique circumstances, financial goals, and financial management needs. Here are a few things to consider when making this decision:
1. Evaluate your Church’s Size and Complexity
Small and medium-sized churches with straightforward finances might benefit from a line-item budget, while larger, more complex organizations may benefit from program or mission-based budgets.
2. Consider Your Financial Goals and Priorities
A mission-based budget aligns spending with your church’s mission, while a capital budget is useful for managing long-term projects and investments. If you have any building projects in the pipeline, a capital-based budget might be best.
3. Analyze Your Financial Management Style
Line-item budgets offer detailed tracking of expenses, whereas zero-based budgets require annual justification for each expense. What lines up with how your leadership and management operate?
4. Assess Past Financial Performance
Incremental budgets make sense for stable financial situations with predictable changes, while zero-based or program budgets are better for managing significant financial variability. The latter makes sense if you anticipate big projects or new initiatives.
What Are The Key Components Of A Church Budget?
Remember that your budget is a comprehensive list of money coming in and money going out. Don’t forget that today’s church accounting software tools are designed to take out the guesswork and save you time, energy, and stress. That being said, the key components of your budget are the following categories:
A. Your Income Stream.
Essentially, all the ways your church brings in money: online donations, tithes, fundraising revenue, anonymous donations, grants, etc.
B. Your Personnel Expense.
This should factor in your staff-related expenses: hiring (and firing!), staff salaries, employee benefits, administration costs, health insurance, etc.
C. Your Operating Expenses.
What keeps the doors open and the lights on? Facility expenses, utilities, mortgage, office supplies, church payroll services, etc.
D. Your Ministry Expenses.
Any expense (one-time or recurring) that’s related to your different ministries (kids ministry, youth ministry, discipleship programs, outreach ministries). For instance:
- Equipment costs
- Program costs
- Bible study resources and books
- Training programs
- Food expenses
- Outreach expenses
- Kids ministry costs
E. Capital Expenditures
Capital expenditure refers to funds used to acquire, maintain, or improve long-term assets such as buildings, equipment, or land. These investments are typically large and are meant to enhance the church's capacity and infrastructure over many years. For instance:
- Building projects
- Renovations
- Expansion of church facilities
- Major repairs (e.g., a new HVAC system or roof)
F. Your Savings
This includes funds reserved for upcoming projects, emergency expenses, and saved money. Your church should have 1-3 months' worth.
G. Your Debts
A church might have several types of debt, including:
- Mortgage loans
- Construction loans
- Equipment loans or leases
- Lines of credit
The Seven Steps Of Creating A Church Budget
Creating a budget from scratch may sound ominous at first, but keep in mind these two things:
- Anything is doable when you break it down into manageable steps
- This is a collaborative effort involving others — you are not meant to tackle this on your own!
Before you start the budgeting process, consider which of these parties can contribute key insights and assistance:
- Staff members
- Finance committee
- Board of directors
- Treasurer/financial officer
- Ministry leaders
- External advisors
- Bookkeepers
- Accountants
Step 1: Gather Information
The first step is gathering and reviewing past budgets (if you have any) and financial statements. Looking at previous financial records (note: the IRS provides guidelines for how long to keep financial records) helps identify past sources of income and expenses. What you should grab: balance sheets, income statements, and cash flow reports.
Step 2: Estimate Income
Estimate regular income sources like tithes, offerings, and regular donations. Don’t forget any special income streams, like fundraising events and grants, as well as rental income or investments.
Step 3: List Expenses
List and categorize all of your church expenses. Common categories include:
- Salaries, Wages, and Benefits
- Utilities and Mortgage/Rental Costs
- Maintenance
- Ministry Programs
- Office Supplies
- Outreach and Missions
Next, estimate costs or reference previous bills and statements (tip: use the bills that come in during the year to add to your list of expenses!).
Step 4: Set Priorities
Ensure that the budget aligns with your church’s mission and strategic goals. Who do you serve, and who do you want to reach? Then, prioritize essential expenses (e.g., salaries, utilities and ministry program costs). Don’t forget to list the nice-to-haves, too (eg: church book library, bathroom reno, etc.). Prioritization helps if you need to make budget cuts.
Step 5: Draft Budget
Finally, we're moving on to the fun part—drafting the actual budget! Based on past data and future needs, assign estimated amounts to each income and expense category. Ensure total income equals or exceeds total expenses, adjusting allocations to achieve balance if necessary.
Step 6: Review and Adjust
Review the draft budget with key stakeholders (the finance committee, church leaders, the church board, etc.) and adjust the budget based on feedback and any new information.
Step 7: Approve Budget
Submit the final draft of the budget to the church board or governing body for approval. While each church takes a different approach, consider sharing the budget with the congregation for transparency and support of the work God is doing and your church’s strategic goals.
By following these steps, your church can create a well-organized, effective budget that supports your mission and financial health. Keep Jesus and this motto close: progress over perfection. You can’t estimate every single foreseeable expense that will arise; ask God, do the best you know how, and learn all you can about church financial management.
Church Budgeting Best Practices
Follow these budget best practices to create a robust, adaptable budget that supports your mission and your church’s financial health.
1. Identify and Involve Key Stakeholders.
Who actually needs to be part of this process?
Not everyone (the same way too many cooks in the kitchen hinders, instead of helping), but input will be required from different ministry areas and leaders. Keep in mind your key people, including:
- Pastors
- Church leadership (elders, pastoral advisors, etc.)
- Board of directors
- Church finance committee
- Bookkeeper and/or accountant
Our ultimate guide to effective church finance committees will teach you exactly how a finance committee operates and how they can help with the budgeting process.
2. Regularly Review and Adjust.
Regularly compare actual income and expenses against the budget to identify any discrepancies, stay on top of spending, and make necessary adjustments. Monthly reports are useful for this... and those church finance reports don't have to be stressful to create! — see our article on how to make a stress-free church finance report.
3. Prioritize Emergency Funds & Savings.
Whether it’s an emergency building repair, replacing a dead audio system, or any number of other unplanned expenses, setting aside a portion of the budget for emergencies (or pursuing grants for church repairs) helps to ensure financial stability. Saving for future projects and long-term goals must also be factored in.
4. Use Technology & Tools to Reduce Errors.
There’s no shortage of tools, software, and apps these days to assist with budgeting and financial management. Choose the software based on your church’s specific needs. We spill the tea here in our article on the 20 best church financial software options.
5. Focus on Mission Alignment
Your budget isn’t just for your finances — it’s to help you be a good steward and use your resources for God’s glory. Staying aligned with the mission God’s given your church goes hand-in-hand with having a good grasp on finances.
Questions to consider:
- What are our church’s strategic goals?
- Which ministries support our core purpose, and how do we serve our community?
- How can the budget help us achieve these goals?
- Are there certain expenses that are weighing us down?
- Are there ministries that aren’t receiving adequate funds?
Conclusion
Now that you're familiar with church budgeting best practices, you can confidently, with faith and wisdom, take charge of your church's financial future.
You can prioritize spending, avoid financial pitfalls, and build trust within your congregation. Most importantly, you'll be able to focus more on your ministry and less on money, knowing that your church's resources are being managed wisely and effectively.
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