Your annual budget was voted on and approved for the new year. But what does it look like to implement this new budget? Is it going to help nurture both your organization’s mission and financial health? The following excerpt from my book, Church Finance: The Church Leader’s Guide to Financial Operations, explores the misleading term “balanced budget” and describes how organizations can better pursue a healthy financial position. While the excerpt is directed specifically to churches, the concepts apply to all types of nonprofit organizations.
In order to ensure that the church has adequate financial capacity to carry out its programs, activities, and initiatives, its leaders must ensure that the church’s financial plan is sound. Sound financial management includes development and approval of a responsible operating budget. Many churches operate under the belief that there is something improper about generating a positive bottom line—that is, a surplus of revenues over expenses. In fact, in many churches, a desirable budget is a “balanced budget”. While operating a balanced budget may seem like an admirable goal, it simply means that the organization expects to incur expenses equal to its revenues. The term “balanced budget” sounds attractive because the term has a positive connotation (what’s the alternative—an “imbalanced budget”? That doesn’t sound like a good thing!). But, if the church’s budget is prepared on a cash basis and is a “balanced budget,” the church is essentially saying that it plans to spend every nickel of revenue that it brings in, with little or no room for error. An unexpected dip in revenues can cause immediate financial stress for such an organization and its leaders. That is no way to improve an organization’s financial position.
A better approach to budgeting involves determining the church’s desired or targeted financial position (liquidity, reserves, debt levels, and so on) and the desired timetable for achieving it. With a long-term plan for improving financial position, the church can develop operating budgets that not only provide for carrying out its mission and purpose, but also can contemplate using reasonable surpluses to contribute toward the targeted financial position.
Improving a church’s liquidity and financial position requires intentional effort as an essential part of the planning and budgeting process. That effort must include planning to spend less than what the church receives in cash revenues. For a church that has been following the habit of spending all of its cash receipts annually, the transition can be challenging. If the church’s revenues are growing, the church may be able to make progress in this area by slowing or stopping spending increases as revenues rise. For churches whose revenues are not growing significantly, the transition will require the church to pursue additional revenue (through additional giving or from alternative revenue sources…), employ expense reductions, or apply a combination of the two.
No matter how good it may sound, a “balanced budget” is probably not an ideal financial operating plan. As demonstrated through this article, an organization’s budgeting process should be much more strategic than simply estimating revenues and expenses. As your organization charts its financial future, use the budgeting process as a unique opportunity to implement and follow a strategic plan to support your mission and develop a healthy financial position.