What Is Wrong With Your Financial Reporting Process And How To Fix It

Financial reporting is a critical aspect of any organization, including churches. However, many churches may not realize that their current financial statements and budget processes are not serving their leaders effectively.

As someone with a background in finance and accounting, I have seen this issue firsthand many times. That's why I want to share some approaches that can help you improve your financial reporting process.

1. Calendar year vs. fiscal year

Consider adopting a fiscal year budget instead of a calendar year budget. A fiscal year that aligns with the church's operations, such as July 1 - June 30 or September 1 - August 31, can provide several advantages:

• It moves the largest giving month to the middle of the year, distributing financial impact more evenly.

• It better aligns the budget year with the ministry year, ensuring financial resources are allocated appropriately.

• It creates two year-end giving promotion opportunities, maximizing giver engagement and support.

2. Calendarized numbers

I see a lot of church financial plans where the numbers are straight-lined for the entire year. In other words, a church with an annual income of $1,200,000 shows $100,000 monthly. That’s not how the money comes in, and it is likewise not how the money is spent.

Instead of straight-lining the numbers for the entire year, it's crucial to consider the actual patterns of income and expenses. By analyzing the past 2-3 years, you can identify consistent monthly trends that will help you more accurately predict cash flow for the coming year.

3. Rolling 12 months

Traditional year-to-date (YTD) reporting can sometimes be limited, especially early in the year when it only reflects a few months of activity. A rolling 12-month financial report provides a comprehensive view of your organization's financials throughout the year. This approach uncovers valuable insights and trends that may go unnoticed in traditional monthly and YTD reports.

4. Zero-based budget

Organizations tend to budget expenses without objectively evaluating whether they need to spend that much in a particular area. They take last year’s number and add a certain % or dollar amount, and that becomes this year’s number. It is not a bad approach, but it can tend to foster inefficient use of resources.

To ensure efficient resource allocation, periodically consider implementing a zero-based budgeting approach. Start from scratch rather than simply carrying forward last year's budget with minor adjustments. Every department should justify every expense item, promoting a more mindful and intentional use of resources.

5. Actual + projected

This is another of my favorites. The financial reporting consists of actual numbers for the months that have elapsed, plus the budgeted numbers for the remainder of the year. In a July 1 – June 30 fiscal year, at the end of November, the reports would include five months of actual and seven months of budget. This combination allows your organization to have an ongoing understanding of where the entire year is likely to end up based on both historical data and projections.

6. Three versions of the budget

Multiple versions of your financial plan can provide a more nuanced perspective and help you prepare for various scenarios. Consider creating high, low, and most likely versions of your financial plan. The high version represents an optimistic outlook, while the low version prepares for the worst-case scenario. The most likely version serves as a practical and realistic guide for decision-making.

7. 12-month plan with 6-month focus

This is effectively a six-month budget. If you are a rapidly growing church, I would encourage you to consider this approach. It can be beneficial to adopt a 12-month budget but focus primarily on the next six months. If your church governance requires a 12-month budget, do that. But commit to only be focused on six months at a time.

This approach acknowledges the fast-paced nature of growth and allows for greater flexibility in reacting to changes. You can navigate the financial challenges by prioritizing short-term goals while still considering the bigger picture.

8. Vision-based budget

In addition to the current year's budget, consider developing a separate vision-based budget that extends beyond the immediate future. It answers the question, “If we were able to boldly live out the vision we believe God has given our church for the next five years (or more), what level of financial resourcing would be required?”

This budget aligns with the church's long-term vision and provides a roadmap for financial resourcing over the next five years or more.

Take a moment to evaluate your financial reporting process. Does it truly serve your church well? If not, consider implementing one or more of these approaches. They will help you gain a fresh perspective on your financial numbers and ultimately enhance your decision-making.

I hope these ideas are helpful. As always, I am available for further discussion if it would be beneficial for you. You can email me at jim@generis.com.