Building a church budget is a time-consuming, complicated, and often thankless job. It’s something that every church needs, but many don’t feel equipped to do it right. With so many ideas floating around, here are the top five areas that churches need to get right to build an effective budget.
Ignoring Data and Trends when Creating the Projected Target
Most churches have goals, dreams, and desires larger than their donations can support. These plans are healthy and show passion for fulfilling the church’s mission. However, adjusting the budget income total to match all of the plans and ignoring data can quickly become a financial disaster. When building the projected income for a church budget, start with attendance and giving for the last 12 months. Look for trends and budget based on real data, not a wish. Overshooting the target and building a budget based on an incorrect number often leads to mid-year budget reductions or worse, an unsustainable negative cash flow. “For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it?” Luke 14:28. Using data and trends to build a realistic budget doesn’t indicate a lack of faith; it demonstrates good stewardship.
Unhealthy Compensation Expenses
Compensation typically consumes the most significant portion of a church budget, usually around 45% and 55%. Not only is it important to calculate compensation correctly, but it’s essential to ensure the church’s compensation expenses fall within healthy ranges. Churches can use two primary statistics to evaluate compensation: the percentage of compensation to total budget and the FTE (Full-Time Equivalent) employees to congregation ratio.
- Percentage of Budget: This calculation is straightforward; use the total amount of annual compensation (salary, housing, benefits, retirement, taxes, etc.), then divide it by the total operating budget. As stated above, healthy churches have between 45%-55% of their budget dedicated to compensation.
- FTE Ratio: Determining the FTE ratio requires two data points, FTEs and average weekly attendance. The pre-COVID standard for a healthy church FTE to congregation ratio was 75:1. While many churches no longer achieve this ratio in the aftermath of the pandemic, churches have made great strides to improve this key performance indicator over the last couple of years.
Insufficient Funds (Emergency and Sinking)
Every church needs to create and sufficiently maintain two types of funds: emergency and sinking.
- Emergency Fund: An emergency fund is exactly what it sounds like – an amount of money set aside to handle an emergency. Emergency funds take care of the unplanned, unexpected, and sudden expenses that the church never sees coming. Emergency funds allow the church to continue operating during significant upheavals or even financial difficulty. The amount will vary from church to church, but Sarah Thompson from CapinCrouse recommends that churches build an emergency fund to cover 40 to 80 days of annual cash expenditures.
- Sinking Funds: Sinking funds take care of known upcoming costs before they are due. How does this work? Let’s assume a roof lasts about 20 years. That means the church has 20 years to save enough money to pay for a new roof without going into debt or depleting the emergency fund. Churches don’t need a sinking fund for everything, only high-dollar items that wear out like roofs, sound systems, HVAC units, etc. It’s a way to strategically pay for large-ticket items in advance.
Too Much Debt
As Ramsey Solutions says, debt is a thief. Churches with large mortgage payments, building improvement loans, vehicle loans, and other debt to take care of emergencies limit their ability to invest in ministry or compensate their staff appropriately. Building appropriate emergency and sinking funds can help eliminate the need to go into debt. Churches that carry debt need to add line items for debt reduction in the budget to eliminate the debt as fast as possible. Imagine how much the church could invest in accomplishing the mission without making payments on debt.
Ignoring Top Donors
Most churches easily acknowledge those in their church who volunteer their time and talents to build up the church. Some even take the time during the worship service to recognize the talent of the worship and tech teams, or highlight a volunteer in the children’s ministry. But what about those with the gift of generosity? Admittedly, it would be off-putting to thank Joe Smith for his generous donation of $20,000 during a worship service, but why not send a letter of thanks? Let them know their gift’s incredible impact toward accomplishing the church’s mission. Build a culture in the church that says thank you to every first-time giver and every time a large donation comes in.
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