It can take up to five months to create a church budget. This lengthy process includes starting from scratch each year, also known as a zero-based budget. It involves casting the vision for the upcoming year, allowing all of the ministry and operations teams to dream about how each area will contribute to the vision. It then requires analyzing attendance and donation data to determine the target budget amount for the upcoming fiscal year. This step is followed by comparing and revising the submitted budgets to the target. It’s a process of continually refining the numbers with the vision and priorities of the upcoming year. After putting in all of this work, why would anyone want to mess with it halfway through the year? Because things change! Attendance, donations, staffing, inflation, worldwide pandemics, natural disasters, civil unrest, whatever it is, will impact your perfect budget. Mid-year adjustments are necessary elements to adjust the church budget for whatever change is looming on the horizon.
What is a Mid-Year Adjustment
Regardless of how much effort went into creating a church budget that accurately reflects the trend of attendance and donations, it is essential to evaluate actual numbers against the budget because of the fluid nature of operating a church. At a minimum, a church should perform this process bi-annually. The evaluation process involves:
- Income to Target – Determine if the church’s current income (donation) trajectory aligns with the budget target. Building a budget target does not have to be complicated. In its simplest form, it is the sum of the last 12 months of donations plus or minus the attendance growth or reduction rate. For example, if the prior 12-months of donations were $1,500,000, and attendance for the same period grew at a rate of 1.4%, then the budget target is $1,521,000. Using this example, to determine if the church is on track at the halfway point of the fiscal year, the donations should be approximately $760,500. Caution! This simplified formula does not take into account the seasonality of generosity. For many churches, the quarter between October and December has the highest giving of the year. Use historical data to determine the high and low quarters before making decisions.
- Expenses to Budget – Comparing the actual expenses against the budget is easy to do using accounting software. Run a report comparing the actual expenses for each category in the chart of accounts to the budget. At the 6-month mark, each category should be roughly 50% of spending. Caution! This is an overly simplified example. Take note of how seasonal expenses, like youth camps, adult retreats, and outreach events factor in the annual expenses.
Mid-year adjustments take advantage of the opportunity to adjust the church budget based on the actual fiscal year-to-date data. Knowing the trend of attendance, donations, and the seasonality of the church help to make strategic decisions if a mid-year adjustment is necessary.
Why Make a Mid-Year Adjustment
Knowledge is power. Running reports reveal current trends in attendance, donations, and spending. Now, it is time to act on the data. There are three possible outcomes of the mid-year adjustment:
- Take advantage of the increase – This is the best-case scenario. All the graphs are pointing up and to the right. Attendance and donations exceed the budget target, and it isn’t a seasonal anomaly. The church is fulfilling its mission in spades! It is time to adjust the budget based on needs, wants, and crushing debt.
- Adjust to prevent unsustainable negative cash flow – Cutting the budget is never fun. But, after verifying the data, if the trend is unmistakable, doing nothing is not an option. Use the mission, vision, and values as a guide, formulate a plan to reduce the budget. Start by evaluating capital improvement projects, compare the church budget to healthy church budget percentages, look for ministries or projects to stop, and take a good look at staffing levels. And pray. Prayer should always be the first step when making major decisions.
- Continue evaluating the trends – this is when the data shows the target budget numbers are right on course for the year. No changes are necessary. But, this could also be a strategy if the data is inconclusive based on external circumstances that may or may not continue. For example, on-site church attendance dropped at the beginning of the COVID-19 pandemic. But, that doesn’t mean that donations will decrease at the same rate. On the opposite end of the spectrum, an outreach event could create a jump in attendance but is that the new trend or just a one-time spike skewing the data.
The Church is not a building; it is a spiritual organism, a community of people, all at various stages of their faith. The fluid nature of the church makes it necessary to periodically evaluate the attendance, donations, and spending to ensure they are in alignment with the budget target. Use the data to determine the trends and make necessary adjustments. Making mid-year adjustments is not a failure in creating the target, it is a reality of being a good steward.