Creating a church budget can be challenging. A budget is an action plan for the ministry and therefore a very important part of your church's overall financial health.
Below are some key points in setting up a budget for your church.
There are basically three budget classifications. Deciding which one is the right one to use for your church will depend on your church's individual needs.
1. Incremental budgeting, often called line item or traditional budgeting, is based on the previous year’s expenditures.
Most churches follow this budgeting process.
Incremental budgeting takes this year's budget as the basis for next year's budget and makes adjustments to each item for anticipated cost increases or activity changes.
2. Zero-based budgeting starts every program and activity at zero dollars.
This budgeting process is similar to what's used by the executive branch of the U.S. government. The government annually reduces all budgets to zero, making it necessary for every department to justify all financial needs for the coming year.
This is a very challenging and time-consuming process. However, it is useful for churches and nonprofits whose programs and methods of operation carry forth year after year without question.
Some suggest zero-based budgeting as a useful approach about every five years to provide a fresh look at all programs and activities.
3. Program budgeting evaluates all programs and activities based on effectiveness at their current levels of funding and on their potential.
The organization identifies each program or activity, the needs each program serves, and the past effectiveness of meeting those needs.
The second step should be to establish a target budget amount for the upcoming year.
This could be based on funding, pledges received, past levels of giving and projected growth, assessed needs or a combination of these criteria.
Church Accounting Package
A set of 4 ebooks that covers the following topics...
I use traditional (incremental) budgeting for my church and most of my clients. Aplos has a wonderful budgeting module and QuickBook Online (QBO) is pretty easy to input as well.
We do most of them in October, so my first step in preparing a church budget is to run a Statement of Activity from October of the prior year to September of the current year. I export it into a spreadsheet and add a column for the budget. By having a year worth of income and expenses in the first column from the Statement of Activity, it is much easier to anticipate the new year's budget.
Be aware that in QBO you will need to do several budgets if you are using classes to track designated funds. I do a "Total" one with everything in it and then do smaller ones for the different ministries and programs. Same thing for Aplos.
Do generate a Budget to Actual report EVERY month! This is a very useful tool and will provide you with invaluable information.
Finances always are a delicate subject in any church or nonprofit. Without adequate funds, your organization cannot continue to minister effectively. Part of an effective ministry is meeting your financial obligations.
See more on church budgeting.
It is important to protect your organization's reputation in your community, to your bank, staff and vendors.
It is a sad situation when a church is not able to pay its bills on time or has to ask its staff members to hold their pay checks until after Sunday's offering or when more funds become available.
See this page for tips on cutting back on your church's expenses.
So prepare your church budgets carefully and prayerfully. We are to be good stewards of the funds God entrusts to us, and part of that responsibility is to meet our financial obligations in a timely manner.
There is a whole chapter devoted to church budgets in Lisa and my book "Church Accounting - The How to Guide for Small and Growing Churches"
The Budgeting for Churches chapter include:
See more details on this valuable resource book!
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Do you have a question or comment regarding the budgeting issues churches and nonprofits face? Share it!
The following comments, tips, and Q/A were provided by FreeChurchAccounting's generous readers:
Is approval needed on any unbudgeted items?
Our Ministry Council has no policy on how to manage unbudgeted items and wondered if anyone has a guideline. Do you have a maximum amount that you will …
calculating a line item amount expressed as a percentage of the budget
How do i calculate the amount of a line item based on a percentage? For example we give 10% of our income to missions. What formula to i use to calculate …
Failure of budget to be approved
What happens if the church votes down the proposed budget, and a revised one can't be approved before the start of the new financial year? Do you operate …
Church Year Budgeting
Our budget goes from Jan-Dec. Members vote on the budget in Dec which means the budget has to be completed in Nov. Do I go to the previous year say "Nov …
if expenditures go over budget, do you adjust the budget?
We have a VERY successful businessman who INSISTS that if we spend more on a given line item than the amount budgeted, we then MUST immediately increase …
Should funding a repair fund be included as a line item in the budget?
Should funding a Major Repair Fund be included as an expense line item in the budget? In other words, we have a separate savings account for major building …
per cent of budget that should be pastor total compensation
How much should the pastor/priest be paid in a 300 of less member church. Is there a percentage guideline?
Missions and capital campaign included when calculating percentages?
Our church has a general fund offering, and separate offerings for building improvement and missions. Should these other offerings be included when calculating …
Pastor Discretionary Fund
If we setup a discretionary fund that gives the pastor full and unrestricted discretion to distribute it. The total fund is considered taxable income. …
What % of budget is average for building maintenance and repairs?
WE are looking for a rule of thumb.
End of Year Accouunting
How do I apply expenses incurred this year, to the budget for the prior year? For example, last year's budget (2014) has a line item for Missionary …
Church fellowships and dinners
What expense heading/title should be used to record food expenses for church dinners and meetings? Also pastor does not receives a salary from church …
What should the startup budget of a ministry be comprised of?
What is a three tier budget
I would like to know what is a three tier budget and what it consists of.
YE Mission Funds
Through the year, donors designate funds for Missions. If these funds are not used in a given year, how should these funds be carried forward to the next …
Carry Over Added to Budget?
Does carry over or cash on hand at year's end have a place in the next year's budget? Every year the question comes up about how to account for cash …
Setting up budget for part-time employee salary or stipends
Should employee salary or stipends for positions that are only a few hour per week (like organist) be part of the personnel part of the budget, or in the …
Budgeting a pastor's salary in a developing country
When trying to factor non-monetary offerings in to the church budget, would it be best to liquidate them so as to factor the cash value in to the budget; …
Budget approval meaning!
Does budget approval by the church mean that every expense is approved. Does that automatically approve salary increases and etc. Should a budget just …
How much percent of income should be for misc fund raising (such as bake sales)? For example if all our churches income through pledges and cash donations …
Income vs. Expenses
Does income vs. expenses be the same number in a budget? Or may the expenses be less than the income? In my preliminary budget my income exceeds the …
Three Tier Budge
I am working on a school program where I have to create a three tier budget for a church. Do you have any samples?
Depreciation and annual budget
Should depreciation be included in the annual budget or left as an unbudgeted item since it is not a cash outlay? I understand that it has to be expensed …
staff expenses percentage items
Do you include payroll processing fees in staff expenses in a church budget?
How much should the church hold in reserve?
I am the pastor of a small church. Our annual expenses are $60,000. We have no debt. We have a reserve fund of $74,000. So we have a reserve that is …
Designated monies reimbursing budget?
Our church spent 2000.00 in January 2010 from budgeted funds. In August 2010, a donor contributes 2,000.00 designated for worship. Does this mean …
Do you have to list the pay amount for each employee on the church budget report that's handed out to members during quarterly Financial meeting? Can that …
What Percentage of Budget is Average for Salaries
What is the average % of salaries in a church budget? vickey's reply There is no "easy" answer! Dan Busby, CPA, states in his "Church and …
Budget tracking vs financial accounting
I am new on our church Budget/Finance Committee. The Financial Secretary produces: 1)A monthly Year-to-Date Budget Comparison and a monthly financial …
Church Budget Allocations for Outreaches
What is the ideal percentage should be allocated for church outreaches, missions and or ministries? Vickey's reply That would be determined …
Setting up a Budget for a Small Church
Need help on how to set up a budget for small church with 5 departments. Vickey's Reply Decide what type of budget you want to use. …
The comments above are for general information purposes only and do not constitute legal or other professional advice on any subject matter. See full disclaimer.
If you want to DIY your payroll, I highly recommend you look at using Gusto! It is very user friendly and their support is awesome! Plus they know how to set up and maintain payrolls for churches and nonprofit organizations.
Note: I am a "partner" of Gusto, but as I have told you before ... I never recommend anything that we or our clients have not tried and love =)