Church Budget and Finance Archives - Page 2 of 9

By Michael Castrilli

Prioritize Your Time

There is no doubt that church managers are busy people. As you develop a budget, focusing on the “right” areas of the budget means prioritizing your time so that you spend the greatest amount of effort on those areas that will provide the most significant benefits. A nice tool to deploy during this phase of the process is to calculate the Budget Category Impact Percentage (BCIP).

If time is money, the BCIP calculation is a simple formula that can assist you to quickly assess the relative size of a specific budget category as compared to the total receipt or spending for the overall Income or Expense category. If you calculate which categories have the greatest impact on the budget, you can spend the majority of your time focusing on those areas.

Let me use a simple example of revenue categories to show you what I mean:

St. Jane’s Church

At the fictional parish of St. Jane’s, the church receives revenues from the following sources:

Next, calculate the BCIP by dividing each Revenue Category by Total Revenue.

Total Collections ($357,000) divided by Total Revenue ($378,300) = BCIP (94%)
Total Holyday Collections ($16,000) divided by Total Revenue ($378,300) = BCIP (4%)

Using a spreadsheet or other mode to make calculations, you can make the calculations for each category quickly by dragging the formula down the column. As you review the information, what are your observations?

Like most churches, Sunday Collections drive the majority of the income for St. Jane’s. You can see that items like Flower Donations and Bulletin Advertising make up only a tiny proportion of the overall revenue.

“So, why does this matter?”

The problem is that many churches spend an inordinate amount of time on reviewing/estimating/analyzing categories that are not driving large portions of the budget. If you have two hours to spend on a budget analysis, focus on the largest drivers of revenues and expenses. By the way, the same process used above for revenues should also be used for expenses. Most likely, after you calculate the BCIP on expenses, you’ll find that salary and benefits make up a large proportion of expenses, and this makes sense because people are your most important resource! Take the analysis to the next step – what is the next expense category that is driving expenses? And the next?

Tip 7: Prioritize Time – Calculate a Budget Category Impact Percentage (BCIP)

Armed with this information, you can begin by reviewing those categories with the largest impact on the budget. I am not arguing that all budget categories are not important. But, with limited time, focus on the income or expense categories with the greatest impact on the budget.

Read More Church Finance 30/30 Tips

Portions of this text come from Michael J. Castrilli and Charles E. Zech, Parish Finance: Best Practices in Church Management (New York: Paulist Press, 2016) Chapter 5.

By Michael Castrilli

Step-By-Step Strategy to Help Churches Hire A Contractor

Selecting a company or individual to do major work at the church can be overwhelming. From short and long-term impacts on money, time, and people, along with oversight responsibilities, resources are always limited (scarce). Investing in the right people, places, or things are critical for effective parish management.

This post describes a step-by-step process churches can use for evaluating and selecting a vendor, contractor, or service provider. Recognizing this can be a complex topic, the goal is to break the process down into manageable parts. After learning the method, you can right-size the concepts to fit the needs at your church.

Examples, where you might like to use a selection strategy, include large–scale projects like choosing an architecture firm to put blueprints together for a parish facility or deciding which builder to hire for repairing the church roof. This type of process can also be used for major purchases like choosing which church management software to buy.

To simplify the terminology, throughout this post, I’ll use the words “contractor/vendor” as an all-inclusive term to include any external product or service being purchased by the church. For example, this term encompasses service providers (e.g. architecture firm, lawn care company), builders/manufacturers (e.g. construction company), Jane/Joe self-employed business, and/or vendors (e.g. church management software company).

Challenges

One of the main reasons selecting a contractor/vendor can be so complex in the church environment is that at times, the lines between pastoral care and business interest get blurred. Let me use an example of a local church that is seeking to hire someone to replace the roof.

Church Roof Replacement: The parish administrator made a presentation to the parish council on the need to replace the church roof. The estimated cost for the current roof to be removed and a new roof to be replaced is in the $100,000 ballpark. After the presentation, a member of the Council approaches the administrator and says, “My company would be happy to do this work. I’ll even try to get you a discount.” At first glance, this may seem like the perfect solution to the problem. However, going forward with this generous offer, without considering other options can be a major mistake.

How many stories have you heard where a parishioner (or their company) is hired for a project, there is a problem (maybe with schedule or cost) and then one party feels stuck with limited recourse. Whether it is the result of unclear boundaries or simply one party deciding to avoid conflict altogether, this can be a slippery slope. Of course, there are always exceptions, but, why risk misunderstandings, hurt feelings, and poor outcomes because no process existed to ensure that the right company, individual or product was purchased?

Creating a clear and transparent selection process benefits everyone involved. The process benefits the parish management team by creating a structure to make informed decisions. The process benefits contractors/vendors because all are fairly evaluated on clearly defined criteria.

Church Roof Replacement: Even though the parish administrator decides to hold off on accepting the parishioner’s offer, this does not mean that the parishioner’s company will not be considered for the job. If the company decides to put in a bid for the work, they will have to participate as part of the broader contractor selection process.

Selecting an Award Recipient

Let’s use a simple example to help understand how the process will work. Two teachers have been appointed to choose a winner of a student essay contest. The award is based on the following criteria: essay content, clarity of the student’s writing, proper use of grammar and the inclusion of a formatted bibliography. Recognizing that these criteria are not of equal weight, the teachers create a grading rubric that assigns points based on the relative importance of each criterion to the total grade.

Using the points system, the teachers then individually grade each student’s paper. When the grading is completed, the teachers average the grades and come together to discuss the results.

Now imagine using precisely the same process with different variables and weights for contractor/vendor selection at your church.

Step 1 – Define Requirements

Typically, organizations will refer to the initial phase of buying anything (whether a product or service) as procurement planning. Procurement planning is the process of deciding what, when, and how to purchase (buy) goods or services. This process involves the development of documentation to solicit (request) quotations, bids, and/or proposals from companies or individuals to complete a program, project, or task. Like any investment at the parish, whether large or small, getting clear on goals, needs, and requirements is critical.

Church Roof Replacement Example: Depending on whether the replacement of the roof is an immediate or longer-term need, the parish administrator and pastor discuss the timing for initiating the project. They discuss and decide that the work should be completed by November so that the roof is protected for the winter months. They also discuss the desire to work with a company that has previously worked with churches and comes highly recommended from a neighboring parish.

By brainstorming requirements, you establish some guideposts for the next step in the process. If you are unsure where to begin, many dioceses have resources available to help parishes in this phase of the process. There are also organizations that offer tools and templates to assist churches with defining requirements related to procurement decisions.

Step 2 – Establish and Weigh Criteria

Once requirements have been developed, it is important to brainstorm and establish criteria to evaluate potential contractors/vendors. Like the example of the teachers creating a rubric for essay evaluation, what are the driving factors that will help you make the decision on which contract/vendor to choose? To determine priority weights, consider the relative importance of each criterion and the impact this criterion should have on the overall score.

Some hints when developing criteria and weights:

Prioritize. Initially, you may have a large list of requirements and criteria. Take time to narrow the list down so that you have only the most critical items. Otherwise, you might fall into the trap of ‘information paralysis’ where it is difficult to differentiate any information.
Ensure that you have clear criteria definitions. Definitions will ensure precision around what has been developed so that you can return to this information in the future. Have you ever attended a meeting, a decision is made, and then a month later everyone gets back together and forgets what was decided? If this sounds similar, you are not alone; it happens in every organization.
Keep rating scales simple. Whether you decide to use a 1-100 (A+) or 1-10 (high) scale to rate proposals, simplicity will help reduce any confusion. You may also consider creating definitions for the scales. For example, “To receive a score of 10, the proposal must include X, Y, Z.”
Collaborate! Use a team approach and get others involved in this process. No need to let all of the responsibility for this process fall on one person. Allow this process to be a shared responsibility.

Step 3 – Solicit Bids

Next, you are ready to seek contractors/vendors to bid on the work. The solicitation document that is commonly used to seek bids from service providers is called a Request for Proposal (RFP). The RFP will typically include answers to the following questions:

What is the nature of the project? What are the requirements and expected deliverables for the work?
Where is the location of the work? Who is the organization that is making the purchase?
How will proposals be evaluated and what are the submission guidelines?
When are proposals due?
Who is the main point of contact?

In the Catholic Church, many dioceses will also have particular laws (financial policies) in place that require parishes to participate in specific bidding processes. For example, some dioceses require that for contracts over a specific dollar amount, the parish must request bids from at least three companies. It is imperative to be aware of what diocesan protocols may be required when examining these issues at the parochial level.

Step 4 – Evaluate Proposals

Once proposals have been requested and submitted, gather the team, and score the proposals using the criteria and weights that have been established. In choosing who should take part in the evaluation process, consider key people that will be most involved in working with the contractor/vendor.

Church Roof Replacement: Companies A, B, and C have submitted proposals for the roof replacement project. The pastor, along with the parish administrator and a member of the church maintenance staff reviews the proposals and score them against the established criteria. Once the ratings have been completed, the group will gather to discuss the results.

There are many ways to tabulate the results, but a straightforward approach is recommended. Recall the method used by the teachers to grade essays in the example above. The process can be simple:

Individually grade the proposals (essays)
Average the grades per proposal
Summarize and discuss the results.

Step 5 – Select Winner

Bring the evaluation team together and discuss scoring results for each proposal. At this point, the hard work you have completed in earlier steps of the process will pay off. You have all of the information you need to make a great selection decision.

Church Roof Replacement: Company A and B came out with the highest scores. After reviewing the information, the team decided to go with Company B. Although the bidding price from Company B was slightly more expensive than Company A, the differentiating factor came down to Company B’s excellent references and their extensive work with churches.

In this step, be sure to allow raters to confer on why they chose certain ratings for the various proposals. Rating or metric based systems are only one means of evaluation. Subjective data from individual experiences, organizational history, and general knowledge of a topic should never be discounted. The key is to bring people together, recognize and openly discuss any biases and celebrate the fact that there are always differences of opinion. “No one of us is as smart as all of us.”

Summary

Create a process, even a simple one, to evaluate and select contractors/vendors for major purchases of products or services. By defining requirements, establishing criteria, and developing a simple, yet clear evaluation and selection process, many positive results occur. First, the process will promote a spirit of equity, openness, and accountability both internally for the parish management team and externally for those working with the church. Second, although every decision will not have the same requirements, by following this systematic approach, you will have created a strategy that you can transfer and repeat for future purchasing decisions. Finally, the results of this process promote a church management structure that is efficient, effective, and transparent in conducting the business of the church.

This article was originally published by Villanova University’s Center for Church Management and Business Ethics by Michael Castrilli

By Michael Castrilli

Church Budget Methods: Take it from the Top!

Which budget method(s) do you use when you create your church budget? How do you estimate revenues and expenses?

There are a variety of methods you can use to create an effective church budget. Three common techniques:

Top-down budgeting
Bottom-up budgeting
Incremental budgeting

Let’s begin with top-down budgeting.

Top-Down Budgeting

I know it may be intuitive, but a top-down approach to budgeting is when resources are allocated at a high-level and the details are then worked out based on this amount of funding. To use a simple example, think about your salary. Each month, your employer gives you a salary but does not dictate how you spend that money. Unless a pay raise is on the horizon, you know how much money you have available to spend and you work out your budget based on that amount of money.

The same method can be applied to organizations. At certain organizations, a leader will establish how much money will be allocated for a given project and then the budget is created from that level of funding. On the other hand, maybe you receive a donation from a benefactor and you are going to budget those resources using this method.

Like all budget methods, there are inherent advantages and disadvantages.

The advantage of top-down budgeting is that the method is relatively simple. It does not necessarily require labor-intensive cost estimating because the overall amount of money that will be budgeted is established. Using this method, money is then allocated to categories of spending. One disadvantage to top-down budgeting is that you might be forcing or form-fitting various cost elements to meet your target.

Empowerment and Buy-In Go Together

Top-down budgeting can work really well when you know the amount of money you are willing to allocate or you have a set amount of funding being given by an external source. The key is to involve and empower others who will help you manage the budget so buy-in is established early in this process. As a general rule, if the top-down method is applied to budget formulation, it is important for those who are given responsibility for managing the budget to propose and justify enhancements or reductions for the budget they have been allocated.

A simple method would involve asking the Director to detail how she plans to spend the money AND allow her an opportunity to propose changes to the amount that has been allocated. You may now be saying, “Ok, but staff will always seek more resources, right?” Again, this is where collaboration is so critical in budget matters. When staff members are empowered and know that they have input into a budget’s creation, it is much less likely that unreasonable requests are proposed. Budgets that are developed secretly or through closed-door methods serve no one well and actually diminish staff morale. Top-down budgeting works well when those who will manage the budget are involved in the process.

Learn more about the benefits of church budgeting!

Photo Credit: David Holt London Flickr via Compfight cc

By Michael Castrilli

Internal Controls to Protect Your Church Against Fraud

Church internal controls are those processes and procedures, standard in the business world, that are used to ensure the proper handling of funds. In my blog post, Fraud Alert: 5 Tips to Protect Church Collections From Theft, I discussed some simple ways churches can protect against fraud.

Church internal controls are a form of checks and balances with church finances. If one person has sole responsibility for all financial tasks, there is no protection of the person (in the case of suspected fraud) or the parish, against claims of fraud. When internal controls (checks and balances) are in place, no one person or office handles all financial matters.

Solid church internal controls builds a culture of trust, collaboration and shared accountability!

Building on this theme to help churches guard against fraud, I wanted to share some tips that Dr. Chuck Zech, my colleague at Villanova University and co-author of our book, Parish Finance, shared in a recent article in US Catholic Magazine: 5 essential practices to get your parish finances in order. It is a resourceful article that summarizes easy-to-implement tips for adopting an open, transparent, and accountable financial process to protect against fraud and build trust.

Read More Church Finance 30/30

By Michael Castrilli

All Pictures Are Not Worth 1,000 Words

To complement a church financial report’s narrative, a variety of church finance visuals can help enhance a report’s readability and accessibility. I define the term “visuals” broadly, including any graphs, charts, pictures, tables, even art that displays data to accompany a concept, topic, or method. The Chinese proverb, a picture is worth a thousand words, speaks well for the impact visuals can have on virtually any report. Alternatively, I also like to say in fun, when you put together a visual and the picture is not worth at least 250 words, consider not including it!

Open up any word processing, spreadsheet, or presentation software and you will find an endless list of visuals that you can use. However, remember that beautiful colors, stylish charts or graphs may make a report look good, the question is whether the visual adds value to the information being conveyed? Another key question – what is the goal of including a particular visual?

Opportunities for Church Finance Visuals are Endless – Choose Well

Once the questions above are answered, there a variety of visuals you can choose. Without the time in this article to describe every visual available, over the next series of posts, I will discuss a few of the most common used in church financial reports.

As you can imagine, the choice of which visual to include for your particular situation will be subjective based on a variety of circumstances. There is not a one-size-fits-all solution, but there are some general parameters that you can use.

Pie Charts

Pie charts are useful when your goal is to present data on a category/topic as a percentage of the whole. Pie pieces can be easily arranged by color, shape, and highlighted to emphasize information.

Pie Chart Advantages

The pie chart is easy to read, understand, and people are familiar with this visual.
The pie chart is particularly useful to show relative proportions, or percentages of information.The use of colors and pie shapes display well any differentiation among categories.
The use of colors and pie shapes display well any differentiation among categories.

Pie Chart Cautions

Pie charts are often overused without regard to whether these charts are the best choice for displaying certain types of data. For example, a pie chart that offers no distinction between the data (unless this is a goal of your visual) does not add value to the report. If you have more than one data set, it can be difficult for people to look at multiple pie charts and make comparisons.
The recommendation is to use a pie chart when you have between three and seven categories, otherwise, the pie chart may become messy and confusing.
Avoid “miscellaneous” or “other” categories. These terms are confusing and can be misleading. If they are included, ensure that the definitions are clear.

Of course, pie charts are not your only choice. Learn the advantages and disadvantages of the infamous bar/column charts and line graphs!

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