10 Common church financial mistakes

By Josh Henry

In many churches the finances are handled by a volunteer or, in some cases, by the pastor himself. It may be time to strengthen your financial systems, especially if you are making one or some of these most common mistakes.

1. Not Having Enough or Any Checks and Balances

What can seem like the most obvious things sometimes are the first overlooked. We all want people to be accountable and trustworthy, and I’d say for a good percentage of the time, that is true. However, it only takes one problem for an entire church yo go running for the pitchforks.

OK, so you say it’s not going to happen to you or you have complete trust in the team that’s in control of the books. That’s great and what a blessing it is to have a group of individuals you can trust. In most cases that is true.

However, we can share horror stories of churches that thought they had complete trust in their finance team or individuals in charge of the process.

How about the church we heard about that had a person managing their books who delivered reports on time each month showing the church’s finances were in order and doing just fine. The only problem was that she had been spending $3,000 of the church’s money each month on the church credit card at Victoria’s Secret and other stores for her personal use. Since she balanced the card each month, the finance team was none the wiser to the misplaced expenses.

Or the church who had a husband and wife couple keeping the books. Their scheme started small and innocent when their personal bills started mounting up. They cut themselves “IOU” checks from the church justifying that the church would help them out anyway. This small, seemingly innocent involuntary benevolence quickly spiraled to the couple owing the church more than $180,000. When they finally were caught, they said it was a relief because it had gotten out of hand so quickly and they were too ashamed to bring it up to anyone.

Do what I did and set up a Google Alert for the term “Church Embezzlement.” You’ll see an email almost daily with another church falling victim to financial problems.

All these horror stories simply prove the need for effective checks and balances for your finances. The internal controls you put in place early will serve long into the life of your church.

Some things to think about.

  • Who counts the money? How many people are in the room?
  • Once complete, is there a rotation to deposit the money in the bank?
  • Of the people that count, does any one of them input the number to your accounting system?
  • Who reviews the checks processed during the month?
  • Who reconciles the account? Is it the same person who writes the checks?
  • Asking questions like these and preparing for the unthinkable will prove invaluable to you in the future.

2. Incorrect Payroll Processing

A second issue we encounter everyday is churches incorrectly processing their payroll. Because there are plenty of misconceptions out there and incorrect advice. Most churches are not knowingly paying their employees incorrectly; they just don’t know any better. However, to the IRS, the church is responsible for paying and filing correctly.

From pastor’s housing allowance to properly classifying an employee versus an independent contractor, we come across churches every day that need help in this area.

What catches many churches is that they overlook the fact that while they are a religious organization, they also are a business entity in the eyes of the government. As such, there are certain rules and regulations they must adhere to. Just because in most cases the church is a non-profit entity and not subject to the same taxation as other entities, they still are subject to certain employment taxes.

This means that non-pastoral, non-ordained employees should have taxes withheld from their paychecks and as the employer, the taxes must be matched in some cases. The amount can vary state by state etc. so your exact situation needs to be determined specifically.

Secondly, we find in many cases that in an effort to save money, time, whatever … churches will choose to say that paid persons are Independent Contractors and therefore subject to a 1099-MISC form if paid more than $600 for the year. The only problem is that a majority of the time, that person does not qualify for a 1099. The IRS has guidelines and a filter test that can help determine if a person is an Independent Contractor or Employee. The two main items to determine is whether the church exhibits behavioral control or financial control over the person.

Some specifics: (1) If you tell that person when or how to do their job, they are an employee. (2) If you provide the person with the tools and/or supplies to do the job, they are an employee.

Each situation needs to be analyzed on its own merits, but in many cases, we have found that churches have incorrectly classified the employee. Remember, it is up to the church to be sure they are in compliance.

3. Misconceptions About Restricted Funds

Call them restricted funds, designated accounts or donor designated giving, either way they are a widely misunderstood aspect of church accounting. Essentially, if a donor has given money with an expressed intent for you to use, it must be used for that purpose and legally cannot be used for anything else. This is true for both money that a donor designates on their own or money the church encourages donors to give to, e.g. a building fund.

Restricted funds can prove to be a very complicated aspect of your church’s finances if not tracked and recorded accurately. Some churches will set up a secondary bank account for the purpose of keeping track of these funds, although that is not necessary. Often, it can create more confusion to track money this way versus keeping all the money in one account, and the separation kept within the accounting software or ledger.

For most churches, designated funds should be kept to a minimum. They have always been very popular for churches and in some cases do serve a good function. An example of a fund used as a designated purpose would be a building fund. A church decides to put away this money with the intent of using it  some time to purchase or fund a building. Gifts given to the building fund can only be used for the purpose of that building as designated by the church. Now the church could put money aside for a building fund like a savings account, and this money could be used for other things, as long as building-specified donor funds were not contributed to the account.

A major problem with designated or restricted funds is that they could put your church in a precarious position. There are several scenarios where designated funds can hinder a church’s cash flow.

One example is if the leadership is not careful about how they ask people to give to the restricted fund, they may find that general giving will go down as the donors may be unaware that their giving to a restricted fund is in addition to their general gifts and tithes that go to the church’s general operating budget.

Secondly, we can play that problem out to a conclusion and see that a church really can be designated broke. There is a possible scenario where a church has thousands of dollars in the bank but has to close their doors because they cannot pay the bills – all because the donor-designated funds are restricted to the donor-designated purpose.

In most cases, we recommend to “designate” special funds through the budget, and just ask your congregation to give to the general account. Money then can be allocated accordingly from the operating budget, alleviating the need to have any designated accounts.

4. Not Using or Understanding Accounting Software

Anyone not using software to manage their books is crazy.

While that sounds like a simple statement, I still get calls occasionally from churches interested in our system who will tell us a story like this.

“Well, you see, Frank has been keeping our books for 50 years. He’s good and keeps everything in line for us. He has a ledger book he keeps at home with him and things have been great up until now. Frank is getting ready to retire and we need to get things up to speed.”

My general response – after picking my jaw up from the ground – is “Great, let us take care of that for you,” knowing full well the amount of work before us. While many churches don’t have a lot going on each month and their transaction volume is fairly low, it still is crucial to keep accurate records in some sort of software package.

As good as that sounds, I also can say I sympathize, because in all the years we’ve been keeping books for churches, we have yet to find a program that works perfectly for them. There are a few good programs out there that actually cater to churches, but even they are limited by things like being able to export or integrate outside of the program.

Secondly, accounting software is not the easiest thing to work with. All sorts of situations could mess things up and usually require a fair knowledge of accounting and work-arounds to make them work for churches. That’s not even getting into the basics of double-entry accounting that most of them will utilize.

5. Failure to Back Up Records

With so many tools available online to back up information, it’s a wonder so many people get themselves caught in a jam when a crashed computer loses all their information. Cloud computing has become so prevalent and inexpensive, it has made computer hardware almost irrelevant as the sole location to store data. The computer has merely become a device to access the data and information you have stored on the web.

I’ve experienced it myself working for a church. We had a small local network of computers and I was backing up many of our important files to an external hard drive, thinking we’d be safe with that. The only problem was that hard drive eventually failed. I learned my lesson $2,600 later when that disk was sent to a lab to have the files recovered. With tools I could have found for free or a nominal amount each month, I easily could have backed up this information off-site and saved the hassle and costs of recovery.

What are you doing currently to backup your important church documents? Now we can all agree that we’re not talking about national security documents and such, but what would it mean to lose the last three years of financial data for the church? What if something happened to the computer on which everything is stored? What if, heaven forbid, something happens to your church building? And, let’s not forget, what if an employee gets mad and deletes everything off the computer?

Yes, I know. We all can say “That won’t happen to me”… until it happens.

Having regularly scheduled backups will save you in the long run.

6. No Budget Forecast or Ongoing Attention to Budget

We sat down with a church early on in our company and asked the pastor about his budget for the year. It took him about five minutes to look through his drawer before he produced three sheets of lined paper ripped out of a spiral notebook. The sheets listed each month, with four amounts beneath each one. We quickly realized he didn’t have a budget and what he shared was his weekly tithe count reports.

We then asked, “Pastor, let’s say someone comes to you with a receipt to be reimbursed for cookies for the preschoolers, what would you do?” He replied that he’d sit down and write the check.

Now let me stop for a moment and give you a preview of another point. Pastor, if you’re writing and signing checks for the church, stop right now! If your wife is writing checks for the church, stop right now!

OK, back to budgeting.

Having an accurate budget forecast for how to spend money is crucial. A budget is simply a spending guide. It’s not a binding legal document, but it does provide a roadmap on how to spend the money the church has at its disposal. Allocating money at the beginning of each year will make sure everyone is on the same page about how money will be spent.

The budget usually will follow in some ways the vision for the church. That old adage, “Let me see a person’s checkbook and you can see where a person’s priorities are” also is true for a church. How you budget and allocate your resources should be a direct reflection of your mission and vision.

Just as important as preparing a budget is paying attention to that budget as the year progresses. Knowing how the money is being spent will help you keep a handle on cash flow, track expenditures trends that you may not have expected and/or be prepared for emergencies and opportunities that may arise throughout the year.

There are two ways to build a budget:

– Zero based budgeting. What comes in, goes out. With this concept, you plan to spend everything you receive. It’s as simple as making an income projection, then spending that money.

— P&L budgeting. Plan to lose or plan to gain

Since we’re talking about churches, we can’t really talk in the true business sense of profit and loss. However, when budgeting we can talk about planning for a loss in a given year or planning for gain. Just because a church shows excess at the end of the year doesn’t mean they are no longer a non-profit entity.

The only caution in this method is planning to lose without a plan to cover. You can lose money on paper and still be solvent. You also can take a paper loss in a year and your cash flow will cover. You also may have money in reserves, investments, etc. Remember: A budget is not a balance sheet reflection.

7. Not reconciling accounts monthly

With the ease of online banking I think we’ve all fallen victim to “forgetting” to reconcile our checking accounts. Personally, it’s really easy to login, see you have enough money in the account and spend the money.

With a church, that is not anywhere close to acceptable.

Reconciling your account each month provides the most accurate picture of your current financial situation. It is the first step to getting an accurate analysis of your cash flow. Sure the bank may say you have $1,000, but you forget that $950 of checks were written last month and haven’t cleared yet.

For a church, reconciling each month allows you to take a look through each transaction and see how it lines up with your budget for that month. It also gives you the chance to make sure each transaction was recorded accurately.

Be sure you’re getting an accurate reconciliation done each month. Oh, and another note, make sure your bookkeeper or treasurer is getting to zero each month and not being lazy and forcing the reconciliation to balance.

8. Mishandling Year-End Activities

As a donation-based organization, several requirements must be fulfilled yearly for your donors.

First, you must provide them in a timely fashion with a statement detailing their donations for the year.

Second, because you’re a business, you must pay any expenses you want made in the year, before the last day of the year. Now, sure, a day or two afterward technically can be done, but we should all strive for a high level of integrity.

As far as year-end donations go, as long as the donation is received in the hands of the organization before 11:59:59 on Dec. 31, those monies can be attributed to that year. However, money received after that time cannot. It doesn’t matter that the person intended to make the donation in the previous year, it must be received. It also doesn’t matter when the check was dated, the check absolutely must be in the possession of the church prior to Jan. 1.

Those year-end gifts can be deposited to the bank after the New Year with no problem, as long as they were in the hands of the organization in time.

9. Lack of Understanding About How to Generate Income

The difference in budgeting and finance between a church and other type of business is that the church has very little control over their income. Churches for the most part are solely dependent on the faithful gifts of their donors.

For that reason, every pastor must remain attentive to giving. We’ve all been in that position where we have to preach about money. For some it’s uncomfortable, uneasy and creates tension. Likewise, many of the people in the pews will feel the same way.

However, the Bible makes very clear our call to be faithful stewards of the gifts God has provided for us. This is true for both people in the pews and church leaders handling the funds.

People are results-oriented. This is one reason many diets fail. We get started, don’t see the weight loss we wanted in the first few weeks of the diet and stop. Similarly, donors are more likely to continue to give if they are reminded of the ways their money is being used to benefit the church and its ministry efforts.

Another issue to discuss is methods of giving. How easy have you made it for people to give? We live in an era where cash and checks are quickly going away. More often than not, a majority of people have made electronic fund transfers their primary method of payment. Can people give to the church online or electronically?

Going along with this is the cost of cancelling services due to weather. If you’re not providing options for people to give to the church electronically outside of the service, you’re missing income when services get cancelled due to unavoidable circumstances. I’ve not met many churches that can handle missing a week of income.

10. Not seeking professional help

Pastors and church leaders are notorious for trying to wear too many hats. As pastors, in some cases, we’re unfairly expected to do it all. Not only is this unfair, it’s also impossible to achieve.

Knowing what you do well and delegating the rest is good leadership. Additionally, knowing what you should do and delegating the rest is just as important.

For some reason, a perception has infiltrated our church world that says that churches need to be cheap or churches can’t spend money. Sure there’s a tool or service we could use, but Sister Susie can do 90% of the job, so let’s just use her. We all know that volunteers are a two-edged sword. They are great, a blessing, a wonderful asset for any church and provide a huge asset and opportunity. However, many times, volunteers are not free.

Do I mean you have to pay for volunteers?

Not necessarily, (and by the way if you do, see point 2) but they do carry an intrinsic cost. When you rely on a volunteer, you are relying on their schedule. While a volunteer may be providing you a skill or resource on which they are a professional, you still are second fiddle to their regular schedule.

Additionally, all of us will come to a time when we must tell a volunteer they may not be the right fit for the position they are in. We all know this is an uncomfortable conversation and it can create the prospect of internal conflict.

Volunteers also can carry a ministry opportunity cost. If you’re like most churches, your pool of volunteers is not bottomless. They are a limited commodity and utilizing them in the best capacity is crucial. You may have a person who is good at one thing, but great at another. What if both things were equally important. What if they needed to volunteer at their good thing because it was necessary? You are losing out at them volunteering for the thing they are great at. This is especially important if that good thing can be outsourced.

Published January 13, 2022

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Josh Henry

Josh Henry is the founder and CEO at Simplify Church, which partners with churches to handle their business operations so church leaders can focus on ministry. You can contact him at [email protected] and read his blog at Simplifychurch.com.