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October 15, 2009Free Excerpt: The Essential Guide to Church Finances
Most churches don't use a program budgeting method--and they're missing out
Earlier this year, we released The Essential Guide to Church Finances by Richard Vargo, a professor of accounting in the Eberhardt School of Business at the University of the Pacific, and Vonna Laue, a partner at nonprofit accounting firm Capin Crouse.
Below is a free excerpt, which discusses the advantages of program budgeting and why churches that use incremental budgeting strategies put themselves at a disadvantage (and, if you like what you see from this excerpt, you can order your copy of Essential Guide to Church Finances here).
"Traditional budgeting focuses on individual expenditures, such as salaries, supplies, and other costs. As a result, decision-making comes down to increasing, decreasing, or eliminating individual line items. Another approach to preparing the annual church budget is program budgeting. With this approach, costs are identified with the specific programs being carried out by the church. Significantly, each program indicates its goals and objectives prior to funding. Program budgeting operates on the premise that programs are run to achieve certain purposes, and by clearly establishing these purposes, the church can improve both the use of its resources and the effectiveness of its programs. This approach to budgeting forces the church to do its planning before preparing the budget. It also is the same methodology used for Generally Accepted Accounting Principles (GAAP) Statement of Activities and Statement of Functional Expenses, which means your reports will follow these standards.
Steps for the program budgeting process
The program budgeting process begins by requiring the church to identify each program/activity it conducts and the needs each one serves. Next, each program leader examines his or her program in terms of how well it is achieving its purpose. If the leader feels improvements are needed, he or she will also provide an assessment of the benefits that would be derived from making improvements to a program, as well as any cost implications of making improvements. Finally, an estimate of the resources needed to operate the program for the next year is developed. (Churches using multiyear budgets would have data prepared for a several-year period).
Each program leader then compiles the data into a program budget format that includes a statement on the purpose of the program, a description of the services provided, program goals and objectives, the amount of money needed, and the benefits and cost of any program change requested. In preparing the program budget, each program leader receives information on how much of the common costs of operating the church (costs that are allocated among all programs) should be included in his or her budget. The final step involves review by the finance and program evaluation committee, which evaluates the costs and benefits of each program.
Benefits of program budgeting
The benefits of program budgeting are well documented. First, program budgeting provides a better understanding of what each program is attempting to do. Also, because the purposes of each program are specified, the costs of each program can, at the end of the year, be compared with the benefits achieved. Second, this budgeting approach directs program leaders' attention to program achievement--the outputs of spending the money. Remember that traditional budgeting emphasizes the disbursement and control of expenditures, such as those for electricity maintenance, and so on.
As a consequence, the purposes of the programs can easily be overlooked. In program budgeting, program purposes and annual goals and objectives are stated up front so they are not likely to be forgotten when program success is measured.
Program budgeting offers church members a clear picture of what their contributions are supporting and provides them with numerous opportunities to become involved in the process. Both results of the process can help generate a high level of member support for the church's activities.
Disadvantages of program budgeting
On the negative side, program budgeting takes much more time to complete than incremental budgeting. But the extra time spent is not wasted with trivial matters. It is spent planning, establishing measurable goals and objectives, and evaluating how programs should operate. Put differently, incremental budgets can be prepared without planning; program budgeting cannot be done properly without planning. Sadly, too few churches uses this advanced method."
Order your copy of Essential Guide to Church Finances today.
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