In the past few weeks, I’ve lost count of how many Senior Pastors I’ve talked to whose churches are hemorrhaging financially. Dealing with a massive budget shortfall is something every Senior Pastor will face sooner than later.
Churches get into this situation when a combination of the following five factors are in play:
- Common sense budgeting, forecasting, and financial protocols are not in place.
- A comprehensive annual fundraising strategy has not been implemented.
- The Senior Pastor has failed to invest a significant amount of time in recruiting and developing new financial leaders to offset the 20% “churn rate.”
- The attention of the congregation has turned inward, and new congregants are not being sought.
- The leadership did something stupid.
The reality is we have ALL been in this situation before. I have, you have, Bill Hybels has, Warren has, everyone has.
This happens because (a) we’re human, (b) because we’re human we occasionally make dumb mistakes, (c) there are lots of people out there giving church leaders ridiculous advice, and (d) ministry realities are changing so rapidly it’s hard to adapt fast enough.
If you’re facing a budget shortfall, give yourself (or your Senior Pastor) some grace, stop the shaming, and let’s get to work.
Let me briefly talk about each of these factors, and then let me give you a step by step guide on how to get out of the mess you are in. I’ll warn you in advance that this article will be quite long, but I felt I needed to thoroughly answer all the questions people in this situation have, rather than skimming.
How You Got Into This Mess
1. Common Sense Budgeting, Forecasting, and Financial Protocols Are Not in Place.
There are four common sense things you must do financially going forward.
Budget To Last Year’s Income
The most crucial budgeting task that governing boards face is determining the total amount of income they think they can expect to receive the following year. Going forward, that task will become very simple. Next year’s income will become what was given this year. This will keep you from making wildly unrealistic guesstimates on future income, as well as provide much-needed reserves if and when you do grow. If $500,000 was given in 2016, you will budget $500,000 in 2017.
Create A Cash Flow Income Model Based On Your Last Three Year’s Giving
Churches get into trouble when they anticipate, for instance, a 2017 expected income of $500,000 then divide that total number by 12 and expect their income to come in each month at $41,666. Any retail manager will tell you that this is a terrible, terrible mistake. Your income NEVER comes in evenly.
What you need to do is go back over your last three years and look at what your total income was for each year, then determine what PERCENTAGE of that total income came in each month. For example, some churches will receive 12-15% of their income in January and 16-18% of their income in December. If total income for the last year was $500,000, and you received $90,000 in January, that’s 18% (not the 12% you guesstimated). Now go back over the last three years and get percentages for each month, average those together over the last three years, and you’ll have a cash flow income model that is realistic.
What you’ll discover is giving will vary month to month, but the monthly percentage given to total annual income is quite predictable. This is important because half of the battle when managing finances is managing cash flow. Summer months will be light in giving. Therefore September and October can be rough because cash reserves are low. Your situation will be different from mine, but I promise you that your “system” is very predictable.
Once an income model is created that demonstrates how your church gives month to month, then you budget accordingly. If in July only 7% of your total income is given, and you have a $500,00 budget, you can only budget $35,000 worth of expenses UNLESS you put aside money in previous months to pay for July’s expenses.
What I am suggesting is the easiest and quickest way to generate an income model based on past behavior. HERE is a sheet we used in the past that took it to an even more granular level based on percentage of increase/decrease and per capita giving. For most churches, this is way too complicated for their size and complexity.
Never Go Below A Baseline Of One Month’s Reserves
There is no “rule of thumb” when it comes to how much money you should set aside, but I can tell you that most churches do not have enough money. My suggestion is to work towards one month’s reserve in 2017, two in 2018, and three in 2019.
Ensure GAAP Is Followed
GAAP (“Generally Accepted Accounting Principles”) ensures that the financial protocols followed in the world of business are also followed in church-world. Things like division of responsibilities, how money is collected, counted, and reported, routine audits, Federal and State compliance, etc. are things you would think would come intuitively, but they often don’t.
Senior Pastors, you need to insist that GAAP is followed if for no other reason than to cover your butt. For instance, I never touch a check if someone missed the offering plate. I do not have check writing authority. I have a Finance Team check all expenditures and then independently report to our Leadership Team. I’m bypassed in this not to keep me in the dark, but to protect me. In fact, our church is 16 years old, and it wasn’t until last year that I knew where the safety deposit box was located where offerings are placed between services. Your job is to ensure compliance without being the one that maintains compliance.
2. A Comprehensive Annual Fundraising Strategy Has Not Been Implemented.
I don’t need to repeat myself here. Please consult my article 10 Changes That Will Dramatically Increase Giving In Your Church.
3. The Senior Pastor Has Failed to Invest a Significant Amount of Time in Recruiting and Developing New Financial Leaders to Offset the 20% “Churn Rate.”
Outreach focused churches like the ones you and I serve lose 20% of their giving units every single year. This is now the “average” across the board. What this means is if you don’t have a fully functioning leadership development engine already in place, you are headed for a financial apocalypse as we speak. It’s just a matter of time.
I can’t tell you how many GREAT churches, I mean ones doing ALL the right things, STILL get themselves into trouble over this very simple problem. It’s simple math. There’s no grand theological reason why you’re in a financial hole. People move. People get mad and leave. People make dumb personal financial decisions and stop giving (and try to spiritualize their financial mismanagement by blaming you for not “feeding them” and then switching churches). This is our reality. GET USED TO IT and adapt. You are going to lose 20% of your giving units every year, and no super awesome discipleship program is going to change that.
The only real way to fight back against this reality is to develop financial leaders faster than you are losing them. I tell Senior Pastors I coach that when we were 600 and under, I met with ten people a week. I mean I went after anyone that looked, walked, or talked like a leader to lead them to Christ and mentor them. The strategy has changed a bit as our size has increased (it’s now more broadly shared with our whole staff), but the need to find and deploy high capacity leaders that generously give has not.
4. The Attention of the Congregation Has Turned Inward, and New Congregants Are Not Being Sought.
The moment you turned your gaze inward is the moment your church began declining (even if you continued growing for a while). If you’re not growing it is possible you’ve stopped taking two kinds of risks.
First, you must find out what other churches are doing that works and be willing to learn from them. Second, you must be willing to make hard decisions. Knowing WHAT to do is the easy part. Making the hard decisions you know you need to make once you know what you need to do is not.
You’re going to have to fire people. You’re going to have to kill programs that people love. You’re going to have to risk doing the right things and having people walk in order to reach people far from God. You’re going to have to risk not being liked, misunderstood, and maligned (at least for a while). I’ve written a lot about this and would encourage you to read two articles in particular: 7 Must-Do Items For Your Church Growth Calendar and 11 Ways Senior Pastors Can Re-Ignite Evangelism In Their Congregations.
5. The Leadership Did Something Stupid.
I’m not referring to moral failures on the part of leaders, though that can obviously cause financial hemorrhaging for a church. I’m talking about taking out a loan you couldn’t afford, or taking TOO BIG of a risk and ticking off half of your giving units. There’s a difference between a Holy-Spirit inspired risk that is calculated, and pulling a theological Thelma and Louise and driving the car off the cliff.
When you do something stupid, the best thing to do is to stand up, own your decision, apologize, don’t try to deflect blame, take the hits, learn from that mistake, and move on. People respect leaders who own their mistakes. Every Senior Pastor out there can look back on some really dumb things they’ve done over the last few years. Those who can’t (a) lack self-awareness and/or (b) aren’t taking any risks.
How To Get Out Of This Mess
Okay, so if those are the top five reasons churches get into financial trouble, what immediate steps can you take to stop the bleeding right now?
1. Determine How Much You Need To Cut (Then Add 5% To That Number)
The same factors that created the financial crisis are usually the same ones that keep leaders from knowing exactly how much money they need to cut. Your first order of business is to get a handle on reality. Forget expenses, look at your income. How much money is coming in, and based on historical performance how much will continue to come in over the next six months?
Senior Pastors have a tendency to put on rose-colored glasses and think that a giving dip can be quickly solved. Listen, if you’re in a hole, there is no quick fix. It is only going to get worse. Get the number you need to cut and then add 5% to that number. Why? Because I guarantee you’re too optimistic AND the problem will get worse before it gets better.
Your first order of business then is to find out the maximum amount of monthly income you can expect, then reduce your expenses to that amount minus 5%. For the sake of argument let’s assume for the rest of this article that that amount is $10,000 a month.
2. Look For 2-3 Large Cuts Instead Of 25-30 Smaller Cuts
The first thing leaders in outreach-focused churches do when facing a budget shortfall is try to protect staff. That’s a good thing. We don’t want to create a culture of fear, having staff move all the way across the country only to be in fear for their jobs every time a financial dip occurs. But the reality is by the time churches hit a financial crisis they’ve already cut all the little things. There’s not much left to cut.
The Italian economist Pareto said, “If you’re Noah, and your ark is about to sink, look for the elephants first.” What he meant is that in organizations, cutting one large expense (usually staff) has less impact on future growth than erasing smaller but essential components to a whole host of your ministry activities. Not only is there not enough coffee to cut on Sunday morning, but having coffee for guests is key to crafting a hospitable environment to attract new people.
The second thing leaders try to protect is mission’s giving, again a noble pursuit. If you are in a crisis, listen to me, YOUR MISSION’S GIVING MUST BE CUT. At the present moment, you must shore up your financial base or you’ll never be able to give to missions again. Keeping mission’s giving while not meeting budget is tantamount to putting personal retirement contributions on a credit card. The question isn’t will you quickly reinstate missions giving. Of course you will. The question is when. That answer is simple: when your financial house is back in order.
In the wake of the 2008-2010 economic collapse I had to fire a pile of staff and cut ALL our missions simply to survive. I contacted all our missionaries and told some that we were discontinuing our support immediately. Others I told we were discontinuing our support, but would make it up over time. Those were painful, but needed conversations. It took us five years but we made up all of that support, and some.
My advice when it comes to missions: (1) Don’t over spiritualize the decision. There is nothing in scripture that says you can’t cut mission’s giving (2) Make sure you only give three-year renewable commitments to the missions you support and (3) ALWAYS protect the home base first.
That said, if you have big ticket items in your budget that are non-staff and non-missions in nature and aren’t critical to your mission (like, say, an underperforming campus), by all means, cut those first. But let’s just acknowledge up front that those types of items are quite rare.
3. Cut Staff In The Reverse Order That Growing Churches Hire Them
Okay, so you’ve decided that you need to cut $10,000 a month from your expenses, and the only way that’s going to happen is to let go two staff members. How do you go about making those decisions?
My suggestion is to remove personal feelings out of the equation and to base those decisions on what staff will be needed to grow the church in the future. If you can get the emotions and conflicts of interest out of the decision, then this decision is really easy to make. The problem is in smaller churches the guy leading the Elder’s meeting is related to the Youth Pastor, or the Senior Pastor and his wife are couple friends with the Small Group’s Pastor. Things can get relationally intertwined, and when that happens, its imperative that the Senior Pastor makes the right call, period.
If your wife needs to be let go, and you’re dependent upon her income to survive, so be it. If you’re best friends with two of the people you need to cut, so be it. When cutting staff, you MUST be objective and do what is in the best interest of the congregation.
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So how do you go about making these cuts?
1. Pull out a piece of paper and create five columns on it:
- Worship 2. Children 3. Students 4. Adults 5. Operations/Finance
From left to right is the order in which outreach-focused growing churches hire their staff for maximum impact. The first person to hire is a Worship staff member; next is Children, etc. Please read my article The Three Buckets to understand why this strategy is important.
2. Since this is the order in which staff is hired to help fuel growth, during a financial crisis you release staff in reverse order:
- Operations/Finance 2. Adults 3. Students 4. Children 5. Worship
Under the “Operations/Finance” column put down the names of staff you have in each of these areas. If you have secretarial staff, a bookkeeper, janitorial help, etc., put their names here. The rest of the columns are self-explanatory. Put everyone’s name down that’s on your payroll under one of those five areas.
3. Next to their names put how much you pay them per month.
4. Next to each person, I want you to rate each staff member on a scale from 1 to 10.
1 = “Thank you, Jesus, for this financial meltdown because I was praying for this person to leave our team anyway.”
10 = “This staff member is so important I’d jump off a cliff before I fired him/her.”
At this point you should have listed every staff member on your payroll, what they make monthly, how you feel about their performance and the order in which they should be released.
Here’s the hard part:
5. Cut Staff members who are on the left-side (Operations/Finance) of the columns first.
You don’t need a secretary, bookkeeper, or janitor to run a church. They are wonderful to have, but you can operate without them. Our church of 1,700 STILL doesn’t have a full-time secretary/office manager or a janitor. We focus on part-time and volunteer solutions for these needs. We didn’t have a bookkeeper that worked more than 15 hours until we were at 1,300 in attendance, and we still don’t have janitorial staff (we use a part-time contractor to clean 50,000 square feet of ministry space.
This means if you need to cut $10,000 of monthly expenses, you need to see if you can cut enough staff to cover those expenses FIRST from Operations/Finance. Who do you cut first? Those whom you ranked as the least performing when you rated everyone from 1-10.
Don’t have enough to cut in that area? Move on to your Adult ministry staffing area and begin cutting there based on how you rate staff performance. Still not enough? Go to Student Ministry. Still not enough? Go to Children, then Worship.
The hard thing will be if you have a staff member who is a “10” in Operations and you have another staff member who is a “3” in Children.
The way I handle this is to “follow the rule until you face an exception.” Keep adding up staff to cut according to “the rule” of Operations/Finance > Adults > Students > Children > Worship until you come across “the exception” of someone who is under a 5. Of course, you have to weigh your needs carefully, but if I were you and had a person in Children who is a clear 4 and a book-keeper who is a 10, the Children’s person would go first. But that is the exception, not the rule.
FYI: In your discussions I would never classify staff as “essential” and “non-essential.” George Bush Senior did that when he had to shut down the government, and Ross Perot roasted him by saying that in his business if he classified people as “non-essential” he’d have a morale problem!
The issue here is identifying priorities that fuel growth. Everyone is essential, but not at each stage of a church’s growth cycle.
4. Communicate Your Actions Differently Depending On The Audience
Once you pull the trigger on budget cuts, you’re only half way there. The other half is communicating your decisions.
Communicating From The Platform
In general, the “entire” church doesn’t want to know the particulars of who, what, when, where and why. So keep your communication generalized. You want to stand up and say, “As a leadership, we have the responsibility of ensuring that the church lives within the means that God provides. We’ve been facing a $10,000 monthly shortfall for a while and had to make budget cuts to make ends meet. Some of these cuts were painful because they involved people we deeply love, but they were necessary.” Simply put, once you make these decisions, you need to stand up before the church THAT SUNDAY and tell them, then follow that communication with a letter/email the following week.
Communicating To Volunteer Leaders
The volunteer leaders in your church (small group leaders, lead teachers, etc.) will want to know a bit more. To that end, you’ll tell them positions that were cut and why.
Communicating To Staff
Your staff will want to know everything – who was cut, how you’re taking care of them in the severance, your plans for filling their responsibilities, etc.
The rule of thumb I want you want to remember is “specific questions deserve specific answers” and “general questions deserve general answers.” As a rule, I NEVER hold anything back from anyone that asks me one-on-one what’s going on in these situations, regardless who they are. Other than that, however, I carefully tailor communication to match each group’s particular needs.
5. Go After New Money
Okay, you’ve made $10,000 worth of cuts and communicated your actions to the church, your leaders, and staff. What now? You need to make your congregation part of the solution moving forward.
Here are the five things I would do over the next 90 days if I were trying to climb out of a hole.
- I would take up a special offering within two months of the budget cutting announcement. In fact, I would contact every single person who USED to attend your church and moved away and ask them to be a part of it.
- I would make a congregation-wide push to enroll people in repeating online giving. By getting people to give consistently, you’ll increase giving overall.
- I would hold a spontaneous baptism service sometime soon to get everyone’s attention on the main thing and why we give to make it happen.
- I would have a “come to Jesus” talk with your staff and Elder-board about how we can’t ask people to tithe if we aren’t willing to do it.
- I would immediately institute all the giving mechanisms necessary to facilitate their generosity: giving drop-boxes, text to give, giving via a church app, etc. Your goal should be to get your giving to be through 75% non-offering plate avenues.
Listen, I have been through this before, and it is rough. No sugar-coating it.
But you can get through this.
You must, and you will.
If you know of someone in the trenches who might find this helpful, please share this article with them.