Monday, June 18, 2018

Budget Allocations - Part 1: Common Budgeting Mistakes


How do some churches short-change the budget allocation process?

Here are three possibilities:

  • A church takes the easy way out on budget allocations. The simplest and most inaccurate way to arrive at monthly budget numbers is to divide each budget line-item by 12 months. This may work for monthly rent payments and insurance premiums but for most line-items, it is not a valid approach. If January and February always have disproportionate heating bills plus a big annual insurance premium, then every single year you’ll start off quickly sinking behind budget, and then spending the next several months saying, “we are way behind.” Then if a truly “way behind the budget” situation occurs, your appeal may then find resistance or giver fatigue from people saying, “but we just went through that!”
  • A church allocates the line-items based solely on previous year data. This approach is better than dividing the line items by 12 months. However, it falls short of sound allocations because it fails to take into account changes in circumstances for the current year. There may be changes in one-time or cyclical program expenses, such as new or increases in line items that are effective only for part of the year. Suppose last year’s women’s retreat was in the spring and this year moves to the fall. If you don’t reallocate your budget, you might unwittingly spend any spring excess and get caught short in the fall.
  • Budget allocations do not match where expenses are charged. When the budget was adopted, there was an expectation that certain expenses would be charged to particular expense accounts. However, there is a significant mismatch on the charging of some large expenses. Therefore, some categories show major variances only because the budget dollars are on one line and the actual expenses are on another.

What can happen if your budget is not properly allocated?

Here are just two unfortunate decisions that could be made from the report based on poor allocations:

  • Programs are started and jettisoned based on poor information. A new ministry to millennials was started at the beginning of the new church year. Because the comparative data outlook is so gloomy, the church board decides to temporarily stop the new program until finances improve. By the time the accurate data is available, the church restarts the program, but considerable momentum is lost because of starting, stopping, and restarting the program.
  • Staff are hired or terminated based on poor allocations. Based on the inaccurate data at the six-month point, the church board reduces two full-time staff members to half-time and eliminates four part-time positions. A few months later, the church board realizes it took these extreme actions based on faulty information.

Don’t live with your bad budget allocations for the entire year! Read more in this article from ECFA President Dan Busby. (Published in The Church Network inSight Journal - Summer 2018.)