Financial leverage is simply the act of borrowing money to invest. This is done with the hope of earning a return on that money. A return that is greater than the cost. Often, the potential for gain is disproportionately bigger than the cost. But, the cost is fixed and will be the same regardless of the return earned. Small businesses must learn how to effectively manage their degree of financial leverage. Otherwise, they could find themselves buried under the weight of repayment.
Let’s talk about some of the advantages and disadvantages of financial leverage. Also, how the degree of financial leverage ratio can provide insight into net income.
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Financial leverage advantages
Financial leverage is a strategy that can be employed to boost gains. The cost of borrowed money (typically) doesn’t change. So, if that money can be used in a way that earns returns beyond the cost of borrowing – a small business can end up way better off than it would have otherwise.
I always say that every investment comes down to three things – cash in, cash out, and time. If the cost of leverage (cash out) is low enough and the terms are favorable (time), then the cash in has the best opportunity to be big enough to make financial leverage worthwhile.
High financial leverage helps small businesses avoid dilution of earnings from the issuance of equity. It also gives them the ability to put more money to work than they would have otherwise. Both of these advantages can translate into excess returns.
Additionally, interest is tax-deductible. This lessens the tax burden that a company would realize if the same funds were raised through equity. Keep in mind that interest is a fixed cost. A fixed cost that can negatively affect a small business if operating profits aren’t high enough.
Financial leverage is a better fit for some businesses than others
On my sister site, I’ve written often about the benefits of certain business models. For businesses with the right business model, more financial leverage could be very beneficial. This is if it brings in more long-term customers. These business models are conducive to earning a good ROI on borrowed money.
Handling debt responsibly = the ability to borrow more in the future
If a small business effectively employs financial leverage, their creditworthiness improves. With improved creditworthiness, they will (likely) be able to borrow more in the future. If they continue to execute effectively, they can earn compounded returns.
The cost of borrowing (rate) could drop with a successful history of repayment. This could decrease the cost of future financial leverage. Lower cost should mean lower risk. Lower risk increases the likelihood of employing it in a successful manner.
Financial leverage disadvantages
Just as it has the potential to boost gains, financial leverage can also boost losses. Every dollar borrowed represents a little more risk. Again, that’s why the return from the borrowed monies means so much.
But, the lender doesn’t care if your small business makes 10x the cost of borrowing. Or, if it “only” makes 100% of the cost of borrowing. It expects its money back, plus interest, either way.
Borrowing money will increase your cash flow out. If the cash flow in isn’t enough to offset that, then, sooner or later, insolvency will ensue.
It all depends on the context
A lot of the negative stigma surrounding borrowing stems from the personal sector. In the personal sector, when people borrow, they often do so to buy consumer goods. Things that don’t earn any sort of return. These items actually depreciate in value. For example, cars and technology.
Nobody flinches when somebody borrows an ungodly sum of money to buy a house. This is because a house (for better or worse) is expected to increase in value.
Just as certain business models are conducive to financial leverage, others are not. Consider business models that sell time for money or one-time purchase items. These businesses will have to be confident in their financial modeling to ensure that they can earn an adequate ROI on financial leverage.
Finally, the perception of leverage depends on timing. During boom times, the companies borrowing look like geniuses. Conversely, if the economy turns against a business that has irresponsibly borrowed, then they could look foolish.
Financial leverage + operating leverage?
There are two general types of leverage that a small business can use. Operational leverage (which I plan to write about next) and financial leverage. The degree of operating leverage measures the effect of fixed costs (not interest) on operating income.
Beware compounding leverage by adding operating (fixed costs) to financial, or vice versa. This could sneak up on a small business. It could create a situation where management is caught unprepared. The result is potentially catastrophic. It’s important that scenarios like this be modeled out and planned for.
Most people understand the risks associated with borrowing money (financial leverage). The risks of operating leverage are a little more camouflaged.
Make sure you plan around your company’s (potential) total leverage situation. Annual strategic planning with an operating budget allows you to do just that.
Regulatory authorities might paint an overly rosy picture
When interest rates are kept low, the hurdle rate (minimum ROI to justify investment) is also lower. This incentivizes small businesses to take on projects that they might not otherwise. Less is demanded of investments. The pursuit of extraordinary returns might stop short in favor of quick-and-easy (but “good enough”) returns.
Also, by making interest tax-deductible, the effective cost of leverage is lowered even further. This further incentivizes small businesses to use financial leverage. Doing so could amplify any of the previously mentioned disadvantages.
Financial leverage example
The Degree of Financial Leverage shows the amplification that borrowing money can provide to profits and losses. So, for instance, in the example operating budget, the Degree of Financial Leverage is 1.4. This means, at this level of borrowing, that for every 10% change in Operating Profit, Net profit would increase by 14% (10% × 1.4).
That sounds great, but the opposite is also true. If Operating Profit declined by 10%, then this level of borrowing would cause Net profit to decrease by 14%. That’s the nature of leverage. It amplifies gains and losses.
I created a spreadsheet to model the changes in profit due to changes in other line items. It helps to better understand how the income statement is affected by financial leverage,
I started with a Base case income statement for a small business that has $1 million in sales. This example business also has a 20% operating margin with $500K in debt at a 5% Interest rate. Its Net profit is approximately $138K.
This company’s Degree of financial leverage is 1.14 ($200,000 ÷ [$200,000 – $25,000]).
Only one variable was changed at a time. Here’s what I found:
The effects of an increase or decrease in sales
A 10% increase in Sales translates into a 50% increase in Operating profit – all other things being equal. As expected, this 50% increase in Operating profit translates into a 57.1% increase in Net profit. This is because the Degree of financial leverage is 1.14 (50.0% × 1.14 = 57.1%).
The same thing happens, in the opposite direction. When Sales drop by 10%, Operating profit decreases by 50%. Net profit drops by 57.1%.
The effects of an increase or decrease in COGS and SG&A expenses
Since COGS is less than Sales, a 10% change doesn’t have as big of an effect on Operating profit. The result is a drop in Operating profit of 35%. As expected, the resulting change in Net profit is -40% (-35.0% × 1.14 = -40.0%).
SG&A expenses, being even lower, have less of an impact on Operating profit. A 10% increase only lowers Operating profit by 5% and Net profit by 5.7% (-5.0% × 1.14 = -5.7%).
Of course, things work the same in the opposite direction. A -10% change in COGS increases Operating profit by 35% and Net profit by 40%. A -10% change in SG&A expenses increases Operating profit by 5% and Net profit by 5.7%.
The effects of an increase or decrease in Long-term Debt & Interest rates
As shown above, changes in the income statement that result in increases to Operating profit are amplified in Net profit by the Degree of financial leverage.
But, what about changes below Operating profit? As expected, a 10% change in either the amount of LT Debt or the Interest rate, results in a corresponding 10% change in Interest expense.
This hypothetical small business carries a sizable amount of LT Debt. Still, Interest expense is still a relatively immaterial expense. Thus, the effect of a change in LT Debt and Interest rates is only ±1.4% on Net profit.
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Going forward with a new Degree of financial leverage
Because of the nature of the Degree of financial leverage calculation (Operating profit ÷ [Operating profit – Interest expense]), when Operating profit increases, the Degree of financial leverage decreases – all other things being equal. The opposite is, of course, true too.
What does this mean?
It means that if your small business increases Operating profit this year, then your Degree of financial leverage is going to go down for next year. Which isn’t catastrophic. But, it means that a similar gain in Operating profit next year won’t translate into the same boost in Net profit.
To get that, your small business would have to borrow more funds.
On the same token, if your company has a decrease in Operating profit this year, then your Degree of financial leverage will increase for next year. This increase will amplify the effects of a gain in Operating profit next year. But, it doesn’t necessarily mean that you’ll end up ahead of where you would have been if you would have increased Operating profit in year 1.
Shortcomings of the Degree of financial leverage ratio
Again, the Degree of financial leverage ratio is calculated as follows:
Big companies typically borrow money through the issuance of bonds. This means that they only pay interest until the bond matures.
Small businesses, like yours, don’t issue bonds. The nature of borrowing can vary, but often, loans are repaid on an installment basis. E.g. payments consist of both principal and interest.
So, a ratio that only measures the effects of Interest expense doesn’t completely capture the impact of financial leverage. For small businesses anyways.
Two extreme examples
First, consider a small business that borrowed 10x their previous year’s revenue. If they did so at a very low interest rate, their Degree of financial leverage would also be relatively low. But, having borrowed a disproportionate amount of money, they would theoretically have the opportunity to boost Sales/Operating profit greatly.
Also, consider the other extreme. What if a company borrowed a very modest amount of money? But, was forced to pay an exorbitant interest rate? In this instance, the Degree of financial leverage would be relatively high. But, the company’s opportunity to use this leverage in a beneficial manner is limited.
Finally, in order for the Degree of financial leverage to accurately predict the change in Net profit, Taxes must remain at a constant percentage. E.g. they can’t be 21% of Operating profit – Interest expense (EBT) one year and 22% the next. The Forecasted Change in Net profit won’t equal what’s calculated in the Confirmation.
The amount of LT Debt and the Interest rate/expense must also remain constant for the “Operating profit × Degree of financial leverage = Change in Net profit” equation to work out.
So, obviously, the Degree of financial leverage has limitations. It is designed for big businesses – not necessarily small ones. It is based on amounts in the income statement, and not the cash flow statement. Thus, no consideration is taken for the effects of principal repayment.
If its limitations are kept in mind, and if reasonable changes are forecasted, then it can provide guidance on the potential benefits or detriments of financial leverage.
How financial leverage affects business decisions
Plug your small business’ information into the Your degree of financial leverage worksheet. It will help you better understand how your borrowing might help or hinder you in the coming year.
Financial leverage, in and of itself, is neither good nor bad. It’s all about how it’s employed. If it’s used to buy (rather than sell) consumable assets that provide little or no return – it’s wasted. If it’s allocated to resources that increase productivity (or earn extraordinary returns) – it’s a valuable tool for small businesses.
What are your thoughts on the use of financial leverage?
What are some of the advantages and disadvantages I neglected to include?
How about some ways that you’ve effectively employed financial leverage in your small business?
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Estimate the amounts and timing of cash inflows
Forecast the amounts and timing of cash outflows for expenses and capital projects
Determine a desired ending cash balance for every month in the planning period
Factor in the effects of short-term and long-term financing
Analyze the most likely, best-case, and worst-case scenarios in your financial statements
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Sample church financial budget to help your congregation reach its goals
All right, we finally made it! This is the third post on church budgeting. It’s also the sixth, and final, post on church strategic planning. Yes…this is long overdue.
Capital budgeting for churches was addressed previously. As was creating an operating budget. The capital budget involved the forecasting of cash inflows and outflows from the installation of a new parking lot. The operating budget involved estimating revenue and expenses to arrive at a pro forma (estimated) income statement.
The financial budget builds off of the operating budget. It allows your church to estimate the timing of cash inflows and cash outflows. Doing so will help ensure that your church doesn’t run up against a cash flow crunch throughout the coming year.
Yes, strategic planning is time-consuming and labor-intensive. Never more so than the first time you do it. For the church that is serious about ensuring the ongoing fulfillment of its mission, it is time well spent.
What is a church‘s financial budget?
A church financial budget walks through the expected timing and amounts of cash receipts and expenditures over the course of the next year. Churches are in a unique (and somewhat enviable) position since most of their revenue comes from donations. They typically receive cash instantly.
One exception, for the church, might be Facilities use charges, or something similar. Revenue like this is often paid in advance to reserve dates and times. Since the cash comes in earlier (typically) than when the service is delivered, there could be a situation where cash flow and revenue recognition are different.
On the cash disbursement side, a church faces a lot of the same issues as a for-profit business. The recognition of expenses could be different from when the actual cash leaves the church’s checking account.
The church’s Cash Collection Schedule and Cash Disbursement Schedule will come together into a Cash Budget. It is here that the church will have the opportunity to adjust the Desired Ending Balance. And to make any tweaks to Short-term or Long-term Financing arrangements.
Everything culminates with Pro Forma (expected) financial statements. Just as with the operating budget. This allows the church to compare where they start the year with where they end it. With this information, Ratios can be calculated. More importantly, needed action can be taken to hedge potential problems.
Also, a chart illustrating the month-to-month changes will be available. Also, your church will have the opportunity to play with best-case and worst-case scenarios.
The importance of a church financial budget
Cash is the lifeblood of a business, and a nonprofit organization is no exception. All strategic planning plays an important role in preparing for the future. However, none of the steps may be more important than the financial budget.
Failure to plan for potential shortfalls in cash could mean shuttering the doors. I could mean forever forgoing the opportunity to lead your congregation to the achievement of its mission.
How does a church’s financial budget differ from an operating budget?
A financial budget forecasts cash flow in and cash flow out. An operating budget, if you’ll remember, forecasts revenue and expenses. The difference might seem negligible, but there are some important distinctions.
Operating at a loss in a particular month (e.g. having more expenses than revenue) won’t necessarily constitute a crisis in your church. It can’t go on forever, but if it’s a short-term problem, you should be able to push through it.
But, having more cash go out than comes in during a given month will obviously deplete your cash on hand. Beyond that, if the difference is big enough, and goes on for long enough, your church will be in real trouble.
Cash is king
You don’t pay your bills, or your employees, with numbers on a spreadsheet. As great as spreadsheets are, they can’t do that for you. You pay expenses with cash. So, even if things look good on a spreadsheet or a financial statement, if the cash isn’t there, problems could start compounding.
Over the long-term, the amount of revenue should equal the amount of cash flow in, more or less. Likewise, the amount of expenses should equal the amount of cash flow out. It’s all a question of timing.
An operating budget is important to make sure that your church stays financially healthy for the upcoming year. A financial budget is important to make sure that your church stays solvent from month to month.
One more important distinction is that a financial budget (specifically the cash budget) takes into account things that the operating budget does not. For example, capital projects, financing, and investments. I’ll illustrate the effects of these sorts of things later in the post.
How does a church financial budget differ from that of a for-profit company?
A financial budget for a church versus a financial budget for a for-profit company will differ in a couple of ways.
On the cash collection side, a lot of a church’s revenue is recognized at the same time the cash is collected. The same is not true for your typical for-profit company. The exception, for a church, might be a facilities use charges, or something similar. The timing of cash receipt and revenue recognition being so close together make the cash collection side of a church’s financial budget a little bit simpler.
The cash disbursement side of things will be similar to a for-profit company. Bills are bills after all. When expenses hit versus when they’re paid could be very different. Additionally, capital expenses, if applicable, will require big chunks of cash to be spent at one time. Just as is the case with for-profit companies. Conversely, though, income taxes are a non-factor for churches.
Other factors will be similar between a for-profit company and a church when it comes to financial budgeting. The church may still require short-term and long-term financing. Also, it may put its money into separate savings or investment account, just as a for-profit company would.
So, it stands to reason, that there are a couple of minor differences between the two. But, all in all, financial budgeting is just as important for churches, and other nonprofit organizations, as it is for their for-profit counterparts.
Why should you have a church financial budget?
The reasons for your church to have a financial budget for the coming year are the same as the reasons for doing any other step in the strategic planning process. These sorts of things are done to force you to think about what the future might hold. That way you can best position your church for success.
If your church runs out of cash midway through the year then its very existence might be at stake. Even if your church just gets into a cash flow crunch, that could start a chain of events that might keep it from realizing its full potential.
Certainly, drafting a financial budget and going through all of the steps of the strategic planning process isn’t going to guarantee that your church won’t fall upon hard times. However, it will probably lessen the length and severity of the hard times. Plus, when the hard times do come, then you’ll at least know you’ve done everything in your power to protect your church and to ensure its ongoing success.
One more benefit is the ability to plan long-term and short-term financing. Since these two factors play a large part in the amount of cash flowing in and out of your church, they should be scrutinized. The financial budget allows you to prepare and make arrangements for financing needs well in advance of the time that they become critical.
How to create a church financial budget
Creating a financial budget starts with a forecast of the timing and amounts of cash inflows from revenue sources. As mentioned earlier, since many of a church’s typical revenue sources are of the sort that collects cash immediately – this could be a pretty easy step in the process.
On the cash outflow side, each expense category from the church operating budget will be looked at separately. Each will be unique in terms of when the cash is expected to leave the church. Additionally, this is where capital expenditures will be entered. If you’ve done a capital budget for your church, then you should know the total amount expected to be spent. It’s just a matter of entering the timing.
The cash budget will bring together the Cash Collections Schedule and the Cash Disbursements Schedule. Also, here, you’ll be able to determine a Desired ending cash balance for every month. Beyond that, information about long and, short-term financing will need to be entered.
Everything entered previously culminates in a Pro Forma Balance Sheet and Cash Flow Statement. Along with the Pro Forma Income Statement from the operating budget, you’ll have a complete set of forecasted financial statements for the coming year. Anytime there are financial statements, you can expect there will be Ratios. The Executive Summary ends, as usual, with a chart illustrating the most relevant information from the workbook.
An opportunity is given to play with the best and worst-case scenarios. Just as was done with the operating budget. Here, you’ll have the opportunity to tweak the amounts on your Pro Forma Balance Sheet, Cash Flow Statement, and Income Statement to the positive and negative side. Accordingly, best case and worst case Ratios will also be calculated.
Timing of cash inflows
The Cash Collections Schedule is where you’ll enter the pertinent information regarding timing and amounts of cash inflows.
There are three general sections of information to be entered. The first is related to the timing of the receipt of Adjusted revenue sources. Here, you’ll dictate how much, percentage-wise, you expect to receive in the current month, following month, 2nd following month, and 3rd following month from your Adjusted revenue sources.
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Cash collections examples
If you expect, on average, to receive half of your revenue in cash, from your Adjusted revenue sources during the same month as the “sale,” then you would enter 50% in the % revenue collected current month field. If you expect, on average to receive the other half in the next month after the “sale” then you would enter 50% in the % revenue collected following month field. The other two (2nd following month and 3rd following month) would be 0%. What matters is the Total equals 100%.
Another example – let’s say you only took a 10% deposit for Facility use charges and collected the remainder of the balance three months later. Then, you would enter 10% in the % revenue collected current month field and 90% in the % revenue collected 3rd following month.
Hopefully, this clarifies the purpose of these variables a little bit.
The remainder of the Cash Collections Schedule is where you’ll enter yourAdjusted and Non-adjusted revenue sources. Enter each separately along with the amounts corresponding to the month that the revenue is earned.
Adjusted revenue sources
Adjusted Revenue Sources are those where the cash is collected at a different time than when the revenue is recognized.
For churches, the most practical example I could think of was Facilities Use Charges. Where the church collects cash in advance for rental of its facilities.
Revenue sources such as these, are unique, however. Most organizations recognize revenue first and then the cash is collected afterward. Facilities Use Charges are unique though. The revenue isn’t technically earned until the event for which the facilities were rented takes place. But, cash is collected in advance via deposits or payment plans.
So, the revenue for Facilities Use Charges are forecasted out three months into the following year (2020). This is done because some cash might be collected in Dec-2019 for revenue that will be recognized in Mar-2020.
Below the white cells where you’ll enter the revenue sources and forecasted amounts, you’ll see that the calculations are made based on the % revenue collected from above. The percentages entered there specify how much cash will be collected in a given month from current month revenue, following month revenue, 2nd following month revenue, and 3rd following month revenue. These amounts will change depending on what’s entered in the forecasted fields for Adjusted Revenue Sources.
Non-adjusted revenue sources
Non-adjusted revenue sources are much simpler. All you do is enter your different sources on the left and the forecasted amount for each month in the coming year. Cash is collected at the time of revenue recognition. So, there’s no need to forecast out any further.
At the bottom, the Total cash collections from revenue equal cash collection from Adjusted revenue sources plus the Non-adjusted revenue sources for a given month.
Timing of cash outflow
The Cash Disbursements Schedule is where you’ll enter information about the timing and amounts of cash outflows.
As with any organization, cash tends to leave through more avenues than it arrives. Each category of expenses (from the operating budget) is examined individually. Information from the capital budget will also be entered as it pertains to cash leaving the church.
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The four categories of expenses from the operating budget are looked at independently. Granted, individual expenses within a particular category probably have different timings in terms of cash flow. But, entering each expense separately would needlessly complicate an already intensive endeavor. So, percentages are entered for each category for the % payment of current month expenses and % payment of prior month expenses.
The % payment of current month expenses refers to the percentage of that month’s forecasted expenses which will be paid with cash, in the same month. The % payment of prior month expenses refers to the percentage of the previous month’s forecasted expenses which will be paid with cash this month.
As you might expect, those percentages must add up to 100%. There’s no allocation made for expenses that will be unpaid. Since your church is reputable, and you’ve committed yourself to strategic planning (including all forms of budgeting), you’ll be well prepared for the coming year. Therefore, your church shouldn’t find itself in a situation where it can’t pay its bills.
Each category of expenses is different
The categories are pretty general. Hopefully, they are indicative of the types of expenses that your church faces. Of course, if you were making a financial budget from scratch, you might do things somewhat differently.
Once you’ve settled on the timing of cash flows, it’s time to enter the forecasted expenses for the last month of the current year through the last month of the planning (next) year. The reason that expenses are entered for the last month of the current year is because of the % payment of prior month expenses field. We must know how much cash is going to leave the church in January, because of December expenses.
The relevant cash flow amount is automatically calculated for each month and totaled by category.
Flashback to the capital budget
Think back to the capital budgeting for churches post that I wrote a couple of months ago. You might remember that the plan was for our hypothetical church to add 53 parking spots in the coming year. They planned to do this because the congregation was growing and they need additional capacity for parking.
You might also remember at the expected initial cost for this new parking lot was $208,000.
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As you can see, in accordance with the capital budget, our example church expects to make three payments of $69,333. We’re assuming that, for this construction project, payment will be made in three equal portions over the three months it takes to start and finish the parking lot.
Our hypothetical church isn’t so big that it can disregard the spending of over $200,000. So, obviously, we needed to work that into the financial budget. The capital expenses section of the Cash Disbursements Schedule is where that’s done. This information will now carry over to the Cash Budget. This is where planning can be done for financing, if necessary.
Creating a cash budget
The Cash Budget brings together information entered in the Cash Collections Schedule and the Cash Disbursements Schedule. In addition, financing, both short and long-term are addressed; as are investments.
This is where you will forecast your actual cash balances throughout every month in the planning year. Only a few fields need to be entered. Most of what is analyzed in the Cash Budget is based on the previously entered information.
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Logically, the first bit of information to be addressed in the Cash Budget is your Beginning cash balance. This will need to be entered for the first month of the planning period. You will probably have to forecast this amount if you are (as you should be) planning several months in advance. Don’t worry, as the time gets closer, this amount can be changed and, just as with any of these planning tools, tweaks can be made
From that point on, the Beginning cash balance is automatically calculated. Because, of course, the Beginning cash balance for any given month is going to be the same as the Ending cash balance for the previous month.
Cash collections and disbursements
The cash collections and cash disbursements sections will each pull from their respective Schedules – with a few exceptions.
Surplus(deficit) of collections over disbursements = Cash collections from revenue – Total cash disbursements
This amount represents the difference between cash collections and cash disbursements in a given month. A positive amount means that more cash was collected than dispersed. A negative amount means the opposite.
Notice that the months where cash payment is made for capital expenses – the deficit is rather large. This is to be expected and will be addressed more in-depth later in the worksheet.
Balancing cash
Trial ending cash balance = Surplus(deficit) of collections over disbursements + Beginning cash balance
The Trial ending cash balance represents the change in your church’s cash balance based on the Beginning cash balance, Cash collections from revenue, and Total cash disbursements. There might be situations where this amount is considerably less than you would like it to be (particularly if it’s negative). On the other hand, there might be situations where this amount is more than you need it to be. Situations where you’re holding more cash than you would like, or is necessary.
The amount of cash you want your church to hold at the end of any given month is specified in the Desired ending cash balance field. An amount will need to be entered for every month of the planning period.
This is the amount that the Cash Budget will force balance to, based on the formulas in the worksheet. Forcing is done by increasing cash with investments, short-term financing, or long-term financing. If you don’t like how the balance was forced, then you will have the opportunity to make changes later in the worksheet that are more to your liking.
Excess (shortfall) of cash to desired balance = Trial ending cash balance – Desired ending cash balance
This amount tells you how close or far away your church is, based on the Trial ending balance, to your Desired ending cash balance.
Positive amounts will either go towards paying down debt, or it will go to an investment account. Conversely, negative amounts will either be covered with debt or will be pulled from investment accounts.
Let’s look more in-depth into financing and investments…
Short-term financing needs for your church
Short-term financing is a fancy term for money borrowed for less than one year. Typically, short-term financing is used for short-term cash flow issues.
In this example, we assume that the short-term financing is a revolving line of credit which allows the church to borrow moderate amounts of cash in order to cover the occasional cash flow shortfall.
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You’ll also have the opportunity to enter the particulars about any existing short-term loans your church has outstanding. The rate and term entered for existing loans are assumed to be the same for any additional loans taken out through the remainder of the planning period.
Information entered for existing short-term loans is pretty straightforward. Simply enter the Interest rate for the borrowed funds, the Term (in months) for borrowed funds, the Original amount borrowed, and the Original date obtained.
Keep in mind, this is short-term financing. So the Term (in months) for borrowed funds should be less than or equal to twelve. Anything more than twelve months would be considered long-term financing.
If your church has no outstanding short-term loans, then enter $0 in the Original amount borrowed. Also, keep in mind that the Original date obtained for short-term financing needs to be within a year of the first month of the planning period in order to affect cash flow.
When will short-term borrowing take place?
As mentioned earlier, short-term financing is assumed to cover any shortfalls in cash not covered with long-term financing. It’s also not assumed to be covered with cash pulled out of investments.
The formula for Additional borrowings looks at the Excess (shortfall) of cash to desired balance, Repayments for existing short-term financing, Additional borrowings for long-term financing, and Repayments for long-term financing. If these amounts are less than zero, then additional short-term borrowing is needed.
If that’s the case, enough will be borrowed to cover the Excess (shortfall) of cash to desired balance. Repayments for existing short-term financing, and Repayments for long-term financing minus the amount that’s able to be pulled out of investments. In this workbook, it’s preferable to pull money out of investments rather than borrowing additional funds.
The calculation for short-term financing Repayments is too complicated to cover in detail. It’s calculated in a background worksheet. What this field looks at, is the Original amount borrowed, and any Additional borrowings from previous months. The total of the payments for all those short-term borrowings is displayed here. So, if additional short-term borrowings take place in a given month, the following months you will see an increase in negative cash flow due to the increase in payments owed
Net short-term financing = Additional borrowings + Repayments
This is the total effect on cash flow from activity in short-term financing for a given month. If more is borrowed than is repaid then this will be a positive amount. That’s because more cash came into the church than left it. If Repayments are more than Additional borrowings then this will be a negative amount. More money left the church than came in, due to short-term financing.
Whereas short-term financing covers borrowing money for less than one year, long-term financing covers borrowing money for more than one year. Long-term financing is typically used for long-term projects. For example, projects that have been approved during the capital budgeting phase of strategic planning.
In this example, we assume that long-term financing is used sparingly. It is not a revolving line of credit. Loans are repaid on an installment basis. Since loan amounts are typically big, Repayment amounts are also big.
Also, like short-term financing, you’ll have the opportunity to enter information about any existing long-term loans. The interest rate and term for the existing loans are the rate and terms presumed for any Additional borrowings entered throughout the year. This is unlikely to be exactly the case, admittedly, but for sake of this example, it is adequate.
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For long-term financing currently outstanding, an Interest rate for borrowed funds, Term (in years) for borrowed funds, Original amount borrowed, and Original date of obtained must be entered.
Since this is long-term financing, ensure that the Term (in years) for borrowed funds is greater than or equal to “1.” Anything shorter than a year belongs in short-term financing.
If your church currently has no long-term loans, enter 0 in the Original amount borrowed. If the Original date obtained is further in the past than the Term (in years) for borrowed funds, then the Repayments for the existing loan will not show up in this year’s cash budget. Because… of course, the loan would already be paid off.
Additional borrowings
Additional borrowings for long-term financing are (typically) only done for long-term projects. Therefore, these amounts have to be entered manually. If capital projects are being financed with long-term debt, then you would probably want the Additional borrowings to coincide, roughly with the Cash payments for capital expenses.
Repayments for long-term financing are also calculated in the background. They reflect any existing loans outstanding at the start of the planning period. Plus, any Additional borrowings taken out during the planning period are reflected as increased Repayments in the months that follow.
Net long-term financing = Additional borrowings + Repayments
Net long-term financing is the total effect on cash flow for a given month in regards to long-term borrowings. When money is borrowed, the amount will usually be positive. As money is repaid the amount will be negative.
Using an investment (or savings) account
The investments account, for the purposes of this example, was created to help our hypothetical church always close the month near its Desired ending cash balance. Your church may or may not have a separate investment account, and that’s fine.
In theory, though, it wouldn’t hurt. Many times, on a Balance Sheet, cash and equivalents are grouped together. An investment account such as this might qualify as the “equivalent” to the cash that’s actually in the checking account. It is a place where you could invest excess cash that is relatively risk-free, and liquid (the term liquid, if you’re not familiar, means that it could easily be converted into cash).
Some examples of where you might park your church’s savings or investments are: money market accounts, CDs, short-term treasury bills, or something similar. The amount of return you’re going to earn on those investments isn’t going to be astronomical. But, you’re in the business of running a church, not a hedge fund. So, as long as the money is safe and earning a little bit of a return – that should be adequate.
Click to enlarge
The only field that needs to be entered in the investment section is the Income rate for invested funds. This is the annualized growth rate of monies that are in your investments accounts. The calculation for the balance in the investment account takes place in the background. It does take into account dividends and interest that would be earned in such an account. Income earned from investments is available for future withdrawals.
About the timing deposits and withdrawals from investments
The investments account looks first at the Excess (shortfall) of cash to desired balance. Next, it looks at short-term financing and long-term financing. Any excess cash is entered as a Deposit into the investments account. Conversely, Withdrawals from the investments account are made when the Excess (shortfall) of cash to desired balance and Repayments for both long-term and short-term financing are negative.
Since Withdrawals does not look at Additional borrowings, there might be situations where a Deposit and Withdrawal are made within the same month. A Deposit for excess money borrowed and Withdrawal to cover the Repayments.
Deposits are represented as negative amounts. This is because, technically, they come out of cash. Withdrawals are represented as positive amounts. They represent money put back into the checking account in order to achieve the Desired ending cash balance. Obviously, since the investments account is an asset for the church these negative and positive amounts don’t necessarily represent an increase or decrease in the church’s equity.
Net investments = Deposits + Withdrawals
This is the total amount that the cash balance has changed for a given month.
The ending cash balance
Ending cash balance = Trial ending cash balance + Net short-term financing + Net long-term financing + Net investments
Of course, as mentioned earlier, the Ending cash balance will be the Beginning cash balance for the following month. This is where the church forecasts its cash balance will end up at the end of the month. This amount should approximate the Desired ending cash balance.
“What is the management of cash flow?” Cash management means not only having enough cash on hand to stay solvent but also having enough cash to take advantage of opportunities as they arise.
Cash management can be done in a number of ways. First and foremost, by collecting cash from customers as fast as possible and paying suppliers/vendors as slow as possible.
Also, consider other tactics including using a revolving line of credit, incorporating subscription-based billing, and outsourcing.
Below, you’ll see some practical techniques that your small business can use to better manage cash flow.
Rather than just giving generic advice, I’ll try to give some industry-specific examples. Hopefully, this will better illustrate how these techniques can help and inspire you to do something similar in your small business.
Uncertainty doesn’t jive with cash flow. For every problem, there is a solution. Maybe not an ideal one but there is something that you can do.
Speed up cash coming in from customers
The quicker you can get cash from customers, the better. All the sales in the world don’t mean anything until that cash hits your checking account. Here are some ways to encourage customers to pay faster.
1) Alter your terms
Offering a discount to customers who pay quickly is nothing new. It’s the reason terms like “1/10, Net 30” exist in the first place.
If you’re not familiar, this means that your customer could take a 1% discount if they paid within 10 days. But, even if they elect not to, the invoice is still due in 30 days. Customers who take advantage of this discount will get you your cash up to 20 days quicker!
While a 1% (or 2%, or 3%) discount might not sound like much, it can actually add up to a lot. For instance, not taking advantage of the “1/10, Net 30” terms outlined above would cost your customer over 20% on an annualized basis! Be sure to remind them of that!
This is a particularly good option if your product or service is higher priced. Or, if it doesn’t make sense to get a cash down payment, can you ask your customer to spread the payments out over the course of delivery? These options are especially helpful if you need to expend a considerable amount of cash to get the ball rolling on the project.
Depending on your industry, this might be kind of a hard sell. But, if the amount of the cash down payment is relatively small, your customer may go for it. You’ll never know if you don’t ask. Plus, if it helps to build a better relationship between you and your customer, perhaps they’ll be more receptive.
Computer Repair LLC’s solution
Computer Repair LLC is finding that they’re not getting paid until up to 45 days after services are performed. This has caused cash flow issues in the past since their lease payment, and many other expenses, are due monthly.
In order to better manage cash flow, Computer Repair LLC first decided to start sending out invoices immediately after services are provided. In the past, they had been waiting up to 2 weeks before invoices were mailed. Since several of their customers only cut checks once or twice a month, there could be a considerable time between when services were performed and when payment was received.
They also started including the words “Due upon receipt” on their invoices. They knew full well that not all customers would pay immediately. But, it was an improvement over their old method of making the due date three weeks after the invoice date.
Also, Computer Repair LLC started offering a small discount for payment received within 10 days or less of the invoice date. This provided an incentive for their clients to pay quickly.
Finally, Computer Repair LLC began to routinely monitor the accounts receivable (AR) aging report built into their accounting software. By monitoring this daily, they were unable to keep an eye on clients that were falling behind. When this happened, they followed up immediately to discuss the situation and make arrangements when necessary.
Slow down cash going out to suppliers/vendors
For the same reason it’s good to get paid fast, it’s good to pay out cash slow. Cash that you pay out is no longer in your control – after all! You don’t want to screw anybody over, of course. But, you want to take any fair advantage you can get. Especially if you’re facing a cash crunch.
3) Cut cash expenses
An expense that is eliminated is one that you can delay forever.
Perhaps you can purchase raw materials for less from a different vendor? Or, can you hire part-time or contract employees before committing to a full-time position?
What about overhead and general and administrative expenses? Things like insurance? Can you negotiate better rates? Is there marketing that you can do that’s just as effective, but cost less? How about leases? Can you re-negotiate them, particularly if times are tough?
Finally, and this is a tough one – can you lower your own salary? Would this work if you could lower your own personal expenses?
4) Alter your supplier terms
Just as you can make changes to your customers’ terms, your vendors can make changes to your terms. That is – if they value your business.
Yes, the same principle applies as far as it being beneficial for you to take advantage of discounts. But if cash flow is truly a problem, then it might make sense for you to forgo the discount in favor of sound cash flow management.
Can you get a few more days without sacrificing any sort of discount? That would be tremendously helpful. Every day counts.
Perhaps you’ve tried this with vendors before and have been told “no.” Ask again! The more you ask the more your vendor will understand how important it is to you. Hopefully, once they understand that, they’ll begin to consider it in the name of good customer service.
John Doe’s Restaurant’s solution
Given the nature of his business, John Doe doesn’t have any real problem with cash collection. He does, however, have to deal with a decent number of suppliers. Depending on how good of a day or week he’s had, sometimes the amount he pays his suppliers can cause cash flow crunches.
In order to remedy the situation, John Doe set aside some time to really look at each of his suppliers (and their terms) closely.
In the past, as was his personal habit, John Doe paid his suppliers as soon as he received the invoice. He wanted to be a good customer. He figured that since he was so small, it would keep him in good favor with his suppliers. Also, he knew that if you paid right away, you could take advantage of early payment discounts.
However, because he was interested in improving his cash flow, he decided to do things a little differently. He decided to handle each vendor individually rather than all of them in the same manner.
John Doe discovered that while discounts are always nice, some of them weren’t beneficial enough to offset the advantage of holding on to that cash longer. In instances where that was the case, instead of paying immediately, he made arrangements to make payment as late as possible. For some of his suppliers, this was 45 to 60 days after the statement date.
He also found that some of his suppliers had, what he considered, unnecessarily strict terms. In these cases, he contacted them individually and attempted to renegotiate terms. Not all of the suppliers cooperated. But, some offered bigger discounts for quick payment. Others pushed their terms out further into the future.
Manage cash with financing
5) Get purchase order (PO) financing
If you can’t talk your customer into making a down payment, you may have to finance purchase orders in order to take their business.
Purchase order financing is basically a short term loan for the purpose of paying for products/services so that your small business can complete the sale.
This is typically a somewhat costly option. But if getting this sale is the difference between staying in business and shutting down, then it’s something to consider.
6) Get a merchant cash advance
A merchant cash advance is where your small business gets cash upfront and then you repay that loan with a small percentage of your future sales.
Rather than paying back monthly installments, as with a traditional loan, you’ll likely pay the money back with micropayments over the course of days, weeks, or months. Obviously, as with any type of financing, there will be a cost to do so.
This cash management technique is frequently used by retailers and restaurants.
This technique can be used in conjunction with raising prices because you’re going to need that extra bit of margin in order to pay back the merchant cash advance. Make sure you have a smart plan to invest that cash advance money. It’s going to be costly, so make sure whatever using the cash for has a good ROI.
7) Factoring accounts receivable (AR)
This is another topic touched on in the Understanding Current Assets & Liabilities With Examples post/workbook. Factoring is also known as selling invoices. This is a technique where someone buys your accounts receivable off of you and pays a discount for them. So, you’re obviously not going to get as much for your sales. But, it will push the cash in your pocket right now.
Again, another situation where having high margins pays off.
8) Open a revolving line of credit (LOC)
You’re probably familiar with a revolving line of credit. 2nd mortgages are often lines of credit. As are credit cards.
So, it’s the same principle, just for your business. Borrow what you need, when you need it. As you pay the bank/credit union/financial institution back, you can borrow more.
The risk with any sort of borrowing is two-fold. First, there’s the matter of interest. The cost of money. The higher this is, the more expensive the payments will likely be.
The second risk is the fixed nature of the repayment. If sales go up, those payments are easier to make. If sales go down, they don’t change. They’re still the same fixed amount. This is why I harp on spending for good ROI on this site so often.
Learn more about how financial leverage can hurt or help you by reading this post.
Car Repair, Inc’s solution
Car Repair, Inc. is a one-location auto repair shop with aspirations to expand in the future.
Like John Doe’s Restaurant, Car Repair, Inc doesn’t have any issues collecting from customers. But, the owner has noticed that he often has to hold inventory that’s really expensive for a really long time.
Obviously, some car parts are very pricey. And, since every make/model of car has its own unique parts, it’s can be costly to manage this type of inventory.
He’d also like to be able to advertise more to grow his business. If he were able to do so, he’d like to open up a new location, expand a current location, or purchase a competitor.
While he has enough cash flow to handle typical day-to-day operations, he doesn’t necessarily have enough extra to grow.
At first, he considered getting a term loan to address these issues. But, after investigating further, he found that a line of credit for his auto repair business would make more sense. A line of credit provides him with more flexibility. He only has to borrow what he needs at any given time, rather than having to apply for a new loan every time he wants to borrow more.
Plus, if he should ever find himself in a cash flow crunch because business is a little slower than usual; he has easy access to enough cash to get him by until business picks back up. The flexibility and versatility of a line of credit provide security for his business.
Big business decisions to help with cash management
Beyond the obvious cash management techniques, there are operational decisions you can make to put your small business in a better position going forward.
9) Sell idle fixed assets for cash
This is, of course only an option for assets that are sitting around taking up space. You don’t want to sell assets that are bringing in income. However, if you don’t think that they can be put to good use in the near future, consider selling them. Or, at the very least, leasing them out.
There are pros and cons to this technique. First of all, consider what it would take to buy the asset back if needed. Maybe you’ll be surprised to find it wouldn’t cost much more than what you can sell it for.
Just make sure that you don’t place your small business under further hardship for a quick influx of cash.
10) Turn down work?
This one is also a little counterintuitive. As a small business owner, you know that sales are everything. So you’re probably not in the habit of turning down business. However, depending on your line of work, and the nature of the business, maybe it makes sense to pass on some business. Particularly business that would require an enormous cash payment upfront or financing of purchase orders.
Maybe it doesn’t make sense to turn down the business completely. Perhaps it can just be postponed? If your cash flow forecast says that it would be better to do the work in a couple of weeks/months ask your client if they would be okay with that.
11) Increase prices/margins
Though this won’t necessarily bring in cash faster, there could be more of it when it finally does come in. At that time, more cash could be the difference between paying all of your expenses that are due, and only some of them.
You don’t necessarily have to increase prices across the board. You don’t necessarily have to increase them a lot.
Do you have a product/service that’s in particularly high demand? If so, can you add a couple of percentage points in margin?
Consider what’s unique about your business here. Think about the value you’re adding. When it comes time to pass along a price increase make sure you emphasize those points to your customers.
12) Switching to a subscription-based business model
As a small business owner, you know that it takes cash, time, and effort to make a sale. Probably a little less for a repeat sale. Even less for a loyal customer.
What if you only had to expend that cash, time, and effort once, and then could count on a customer’s cash to keep flowing in month after month? Doesn’t that sound better than starting from scratch after every sale?
There’s a reason that businesses are always pushing you to pay a monthly fee for unlimited products/services (or something similar). It’s because that sort of business model keeps consistent, predictable cash coming in.
Some industries lend themselves better to a subscription-based model, certainly. So, if this is something you’re interested in implementing in your small business, you might have to get creative. Look at your competitors or others in a similar industry. Are any of them offering subscription-based services? Ask yourself how you can tweak their model to make it your own.
Bookkeeper LLC’s solution
Now let’s consider Bookkeeper LLC. Bookkeeper LLC performs routine bookkeeping and some advisory services for other local small businesses.
In its early years, Bookkeeper LLC charged clients by the hour. It seemed, at the time, like a fair way to bill for the services provided. They only paid for what they needed. Most clients were fine with the arrangement.
Bookkeeper LLC noticed, however, that there could be a month or more between when services were performed and payment was received. In addition, as the owner of Bookkeeper LLC has gotten more experience, and more efficient, she’s making less money because she’s billing fewer hours. So, as time’s gone on, sales growth has been lackluster even though hourly rates have been raised.
Another problem that the owner of Bookkeeper LLC foresaw, was this – even if she was able to bring in more clients (to make up for the time she was no longer billing), ultimately there would be a point where she ran out of time. There are only so many hours in the day. As it stood, her business wasn’t scalable.
Also, like any other business that attempts to collect payment after the work is already done, Bookkeeper LLC ran into situations where collections from clients could be downright excruciating.
After struggling with these issues for some time, the owner of Bookkeeper LLC decided to pull the trigger and move to a subscription-based billing arrangement.
Some clients embraced the change.
Other clients pushed back. But, the owner of Bookkeeper LLC explained to them how the change was beneficial. What they paid for her bookkeeping services would be more predictable and easier to budget going forward. In turn, she is indirectly helping her clients to better manage their cash flow.
After switching to a subscription-based billing model, Bookkeeper LLC now, effectively, gets its money in advance rather than after services are provided. Billing and receipts are automatic. Any cash flow problems that Bookkeeper LLC had in the past are now alleviated.
Because her revenue is so predictable, she’s able to manage expenses accordingly. Collections and other accounts receivable headaches are a thing of the past. Now she can focus on working on her business rather than in it.
13) Outsourcing – spend cash to save time
Maybe you’re concerned about your small business’ cash flow situation. But, you’re being pulled in so many different directions that you can’t make time to think on the matter. If so, this may be one of those instances where you have to spend cash to save cash.
Isolate what it is that is eating up most of your attention. Is there someone better qualified to handle this (e.g. bookkeeping or marketing)? Or, is it something where you can easily document your process and hire someone from Upwork or Fiverr?
Getting these sorts of tasks off your back can not only help you focus on the health of your business, it can improve your mental health too.
Jane Doe’s Web Design’s solution
The last business we’ll consider is Jane Doe’s Web Design. Jane’s company creates websites for local small businesses.
Since Jane’s business is a “one-woman show,” so to speak, she’s responsible for every task in the business. This doesn’t leave nearly enough time to do the things she is good at it (and actually gets paid for) – creating websites. Therefore, she doesn’t bring in as much cash as she otherwise could.
When Jane finally decided that she wanted to take control of her cash flow problems, the first thing she did was something that might seem counterintuitive. She spent cash to have other people take care of those things which she wasn’t good (or efficient) at.
One of those things was marketing – specifically lead generation. Since she wouldn’t have to pay until new customers were brought in, the return on the investment was very good.
Also, since Jane isn’t a bookkeeper, she decided to pay for someone else to handle that too. The amount of time that this freed up allowed her to focus on her client’s needs and get websites done sooner. That led to getting paid sooner. It also allowed her to explore new technologies that could provide more value to her clients.
Finally, Jane decided to utilize the services of a virtual assistant. Just as with bookkeeping, doing so freed up an enormous amount of time which translated into more satisfied clients and a more satisfied by owner.
What is the management of cash flow?
Sales are the most important thing for any business. Cash flow is a close second, however. Use the template provided in the previous post to anticipate cash flow issues. Use the tactics mentioned in this post to better position your business for cash flow health.
What other tactics has your small business used to improve cash flow?
What industry-specific challenges does your small business face in terms of cash flow?
“How useful is a cash flow forecast to a small business?” Even a simple, short-term, cash flow forecast can help a small business avoid insolvency. By seeing potential cash flow issues weeks in advance, strategies can be utilized that will allow you to be proactive and help ensure your small business’s survival.
Small business cash flow planning involves calculating the effects of future inflows and outflows. Doing so will allow your small business to plan for problems. Then you can take control of them before they spiral out of control. Below, you can download an easy-to-use spreadsheet to manage your small business’s short-term cash flow.
Most small businesses aren’t “cash cows.” Even the most prudent small business owner can occasionally run into circumstances where cash is flowing out faster than it’s coming in.
Yes, you’re busy running the operations of your business. Maybe you’ve handed the reins of the accounting and finance functions to someone else. But, you’re the owner. You have to ensure that you have the cash available to fill your short-term obligations
Download a simple small business cash flow template
This site is called Spreadsheets for Business, so this post wouldn’t be complete without an accompanying cash flow template.
Complete the form below and click Submit. Upon email confirmation, the workbook will open in a new tab.
This is a really simple template and it doesn’t require too much in the way of input. As with all other Spreadsheets for Business workbooks, the white cells are the ones that you fill in. The colored cells (gray in this case) have formulas and text in them.
The example data illustrates how the template works. It is for a hypothetical bookkeeping company that has revenue in the form of commissions, hourly fees, monthly fees, and consulting. It also has your typical small business expenses including things such as travel, leases, payroll, and utilities
A quick how-to on this spreadsheet
First of all, delete the example data out of the white cells. Then in cell D3, enter your business’s Current cash Balance.
Next, move down and fill in projected cash inflows and projected cash outflows for each day in the upcoming week. This is done in cells D7 through E13. Remember to enter inflows as positive, and outflows as negative. The Running Balance will update automatically.
For each inflow and/or outflow you enter, you have the option of typing a quick note to explain the transactions taking place.
After you’re done entering cash inflows and cash outflows for the coming week, move below and enter them for the upcoming six weeks. Just as above, notes can be entered to elaborate on the weekly inflows and outflows.
Finally, a simple chart is included at the bottom to illustrate the changing cash balance over the next seven weeks.
It might be that your accounting software already does something similar for you. Perhaps it’s even more robust in its analysis? However, if your accounting software doesn’t do such a thing; or if you don’t know how to use it – this simple template will give you the opportunity to think critically (even if only briefly) about this important aspect of your business.
What is small business cash flow projection?
Cash flow projection means looking into the future. Taking what you know, plus what you guess, to monitor your cash balance.
Some expenses, and possibly some sales, you know are going to flow in or out of your business in a predictable manner. You know what day it’ll happen and you know how much it’ll be.
Other cash inflows or outflows might not be as predictable. An unexpected inflow might come your way, and it’d be a very positive thing. On the other hand, you’ve almost certainly had a situation where a large unexpected outflow is necessary. That’s not quite as positive.
Cash outflows, as I’m sure you’re aware, aren’t all negative, however. Ideally, all of the cash that leaves your business is an investment, of sorts. That investment might be in an employee, it might be in inventory, it might be in an asset, or it might be in anything else that helps you create value for your customers. In other words, something that brings in bigger future inflows.
How sophisticated does cash flow forecasting need to be?
The act of projecting your business’s cash flow can be simple or complex. You can use sophisticated software; or a piece of paper and a pencil. What’s important is that you take the time to perform this important task – not necessarily how you perform it.
If you like to approach things from a simplistic standpoint, then that’s what you should do. On the other hand, if you enjoy diving into the details, then there’s really no limit to how in-depth you can go with your analysis.
When you forecast your small business’s cash flow, you can forecast no further than tomorrow; or you can forecast 10 years into the future. The closer to the present you forecast, the more likely your forecast is to be accurate.
A lot can happen in 1 year; not to mention 10 years. So, if you do decide to forecast long-term, just keep your expectations realistic. Financial budgeting is a part of strategic planning. By its nature, strategic planning is focused on long-term horizons.
That being said, there’s absolutely no reason that you can’t do extremely short term planning when it comes to cash flow. We’ll call that tactical planning. And, tactical cash flow planning could be critical to your small business’s success.
Why should your small business manage cash flow?
A lot of business problems are, of course, caused by costs exceeding revenue. Beyond that, however, it’s the timing of cash flow in and out that is the real root of the problem. Once you come up short on cash to pay your vendors/suppliers, pay your employees, or pay for your other assets, it’s easy to picture how this could start a downward spiral from which your small business can’t escape.
The best time to start managing your cash flow is when you started your business. The next best time is right now.
Just committing a little bit of time, and performing a simplistic analysis is better than nothing. However, with the tools available on SpreadsheetsForBusiness.com and from other bloggers or software providers, this seemingly frustrating task can be made manageable.
By taking ownership of the things you can control, you put yourself in a position to better handle circumstances out of your control.
Tactics for managing cash flow
Forecasting into the future, even if it’s only a few days or weeks, puts your cash flow situation into perspective. With this perspective, you should be able to better understand what you can control. You very well might not be able to change the amounts of cash outflow. But, you might be able to change their timing. For instance, can you push an expense back (even just a few days) in order to have it better coincide with a cash inflow?
Conversely, if you see that you’re going to run up against a cash flow crunch in the not-too-distant future, maybe you can make efforts to upsell current customers? Or, maybe you can make a push to find new customers? Doing these sorts of things might bring in cash flow and keep your checking account in the black.
Likewise, if you forecast cash inflow coming in the near future that you really need sooner, perhaps you can reach out to a customer and ask if they can pay a portion in advance? Maybe it even makes sense to offer a small discount if they do so in order to be able to avoid the threat of insolvency.
Cash flow crunches don’t just happen over the course of days though. They can be a long time coming. So, don’t limit your analysis to the very short-term.
I recommend that you also look out over the course of the coming year and walk through the steps of my small business financial budgeting workbook. It accomplishes the same things as mentioned above, except it allows you to take a couple of steps further back to look at an even bigger picture. The benefits are the same, however. You’ll be armed with the proper perspective in order to be proactive in addressing potential problems for your business.
Every business and industry is different. There is no one-size-fits-all advice for tweaking your cash flow. What I want to make clear though, is that willingly or unwillingly turning a blind eye to what the future holds for your cash flow puts you in a position where you can’t do anything. By simply taking the time to look at the future, you’re empowering yourself to be able to take some sort of control.
How useful is a cash flow forecast for a small business?
Remember, a more sophisticated analysis can provide you with better answers. But, the bulk of the benefit comes from simply thinking through the subject at hand and taking proactive steps to avoid problems.
00:00 I’m gonna go over how to go about making 00:04 operating budget for your church some of 00:06 my previous videos you know I’ve done a 00:08 little more in depth with the individual 00:10 spreadsheets and how you know what each 00:12 field is about how its calculating 00:14 everything this time I’m going to try 00:16 something different I’m gonna stick to 00:18 kind of summarizing here and I’m gonna 00:19 put a link down in the description where 00:21 you can read the whole in-depth post 00:24 that covers every single aspect you know 00:27 in detail of the operating budget for 00:30 your church and the video here is just 00:32 gonna be kind of a summary so that being 00:34 said let’s get into it 00:36 we’ll start off here with a ordinarily 00:41 with a for-profit company you always 00:44 start with a revenue budget with the 00:45 church you have a little flexibility 00:47 there you start with a revenue budget or 00:48 with your expense budget so for the sake 00:52 of simplicity I’m going to walk through 00:54 this starting with the revenue budget 00:55 but you know it really is a matter of 00:59 private preference do to kind of 01:01 churches unique situations so revenue 01:04 budget is exactly what it sounds like 01:06 it’s a budget in a forecast for all of 01:08 the money you’re gonna bring in for the 01:10 year so in this case we’ve got the 01:13 different sources listed here offerings 01:15 donations facility whose charges trust 01:18 investments and other okay and we reject 01:21 them out for every month for the coming 01:23 year but the first month of our planning 01:25 period here so if you’re planning 01:27 creative begins in July or September or 01:29 whatever some other month with that in 01:32 there it’ll automatically populate it 01:33 out and all the forecasted amounts are 01:38 total by month and total by source also 01:42 point out real quick that all 01:44 spreadsheets for business templates 01:46 which there’ll be a link to the template 01:49 in the link to the post so you get that 01:53 by going to the post but all 01:56 spreadsheets for business workbooks the 02:00 white cells are adjustable okay the 02:02 colored in cells or other formulas or 02:03 their text so unless you really really 02:05 know what you’re doing don’t touch those 02:07 so revenue budget is pretty simple and 02:11 we’ll move on to the expense budgets now 02:16 let me get rid of the fixed cells here 02:21 there’s separate expense budgets for 02:25 each of the four kind of broad 02:26 categories of expenses the inspiration 02:29 for these categories comes from Bree mal 02:31 FERS if you’ve done any searching on 02:33 YouTube or on the web in regards to 02:36 Church strategic planning you’ve come 02:37 across 02:38 Audrey’s work and he’s does a great job 02:42 and you know definitely a good source of 02:47 information I’ve never seen him put 02:48 forth anything like this not to say that 02:50 he hasn’t that I used a lot of his 02:54 inspiration in creating this template 02:57 for budgeting so now he breaks it church 03:02 expenses into four broad categories 03:04 evangelism emissions personnel 03:06 ministries and facilities so as you can 03:09 sing along the bottom here that’s 03:10 exactly what we’ve done 03:12 each of these four budgets is formatted 03:15 in the same manner so for simplicity 03:17 sake we’ll just look at the evangelism 03:21 and missions budget here so what you got 03:26 at the top here is you know basically 03:29 when it would take those broad 03:30 categories expenses and break them down 03:31 into subcategories so do that first and 03:35 foremost for the evangelism missions 03:36 here and direct and Synod support 03:39 Convention Assessment local mission work 03:40 outreach etc of course each broad 03:44 category has its own separate sub 03:48 categories you came and you’ll notice 03:52 also you’ll have to fill those in 03:54 manually and also you’ll notice that 03:56 each bra subcategory of expenses gets 04:03 category wrap categorized as fixed or 04:06 variable and simply put the post goes in 04:11 a little more detail but you know fixed 04:14 is gonna be the same no matter your 04:16 level of revenue a more revenue less 04:19 revenue you would expect this expense to 04:21 stay the same 04:22 variable on the other hand you would 04:24 expect to increase with revenue and 04:25 decrease increase in decrease with 04:28 revenue less revenue less expense more 04:29 revenue more expense okay so you’ll see 04:32 that all these amounts are filled in 04:34 here a lot of them with zeros because 04:36 there’s a room for plenty of 04:38 subcategories well where’s that 04:39 information come it comes from down here 04:41 below this is where you get into the 04:42 detail okay so you’ll notice each sub 04:45 categories listed here and you can 04:47 detail expenses and this is where you 04:48 actually put in the inmense so you know 04:51 you take a broad category of expenses 04:53 break it down to subcategories break it 04:55 down further into details you know 04:58 depending on the sophistication of your 05:00 accounting software or your accountant 05:04 you know this could be these detailed 05:06 expenses here could be individual GL 05:08 accounts or whatever you want them to be 05:11 but as long as you address all expenses 05:14 that’s all that really matters it’s just 05:16 like I said kind of breaking things down 05:18 here into manageable chunks to where you 05:22 can forecast them out for every month in 05:26 the planning period then they’ll total 05:29 here and those totals will carry up here 05:32 okay so you’ll see like I said every 05:36 subcategory of expenses listed here with 05:39 plenty of room to entered detailed 05:42 expenses okay so you do that for 05:45 evangelism and admission you do that for 05:50 personnel do it for ministries it’s all 05:55 them all the same same format do it for 05:58 facilities so okay you better you expect 06:01 the revenue for the year then you 06:03 entered your expected expenses for the 06:07 year don’t forget like in this example 06:09 real quick here you’ll notice this ties 06:13 into the capital budgeting work that we 06:18 did – I like to make my workbooks tie 06:22 into each other so it can paint the 06:24 entire picture for you guys so that’s 06:26 what this means you know most of these 06:28 are Justin Eric detailed expenses but 06:30 this one here talks about snow removal 06:32 and it has to do with the 06:34 creation of a new parking lot that we 06:36 looked at in the capital budget so check 06:38 that video out to check that post out to 06:41 so and yeah once all expenses are 06:46 entered then that’s the biggest part of 06:51 budgeting okay all that’s going to carry 06:54 over here into your pro forma income 06:56 statement where you’ve got your total 06:58 revenue your total for each expense by 07:02 broad category okay and then we threw in 07:05 a percentage amount here 07:08 that’s a percentage of revenue if I 07:11 remember right yes it is okay just just 07:15 kind of paint the picture of what 07:18 categories are contributing most to your 07:20 expenses then we’ve got operating profit 07:23 which is revenue minus expenses one 07:27 other thing you have to fill in I mean 07:28 pro forma income statement here that 07:30 isn’t really covered elsewhere in the 07:31 operating budget is interest income in 07:35 interest expense okay so this is a will 07:39 have to be a forecast you’ll just have 07:41 to look at you know for income if you 07:44 have income earning assets savings you 07:49 know money market accounts something 07:52 that maybe earns a little more than that 07:54 dividends perhaps enter now here 07:57 interest expense it’s gonna depend in 07:58 large part on the amount you need to 08:00 borrow a lot of that will be covered in 08:02 the financial budget okay but you know 08:05 you can go ahead and do your financial 08:08 budget which I’ll cover in a later video 08:09 and a post that’s coming soon and circle 08:13 back around enter that information here 08:14 too okay you’re not gonna be graded on 08:18 your accuracy in terms of forecasting 08:20 this can be a living document come back 08:21 and change it as you need to 08:23 all right so operating profit minus 08:25 these interest expenses churches don’t 08:27 pay taxes so there’s net profit okay 08:32 there’s a couple of simple ratios left 08:34 in here that are applicable for churches 08:38 okay got profit margin which is pretty 08:39 self-explanatory you know your net 08:42 profit compared to you net sales times 08:44 interest earned looks at those 08:46 looks at interest expense and operating 08:50 profit how it relates to it degree of 08:53 financial leverage again the post will 08:54 get into more detail in degree of 08:56 operating leverage we’ll get more detail 08:58 on that too those are two interesting 09:00 concepts that basically tell you what 09:07 the based on degree of financial 09:10 leverage based on the amount of money 09:14 you borrow what effect increasing and 09:20 decreasing 09:21 operating profit would have on that or 09:25 the rather the effect you’ll have to 09:29 read the posts to get a detail because 09:30 if I start talking about it I’ll go on 09:32 for an hour here and like I said and try 09:34 to make this summary so basically the 09:39 effect of degree of financial leverage 09:41 is the effect of interest expense on 09:45 profit degree of operating leverage is 09:47 the effect of fixed expenses fixed costs 09:52 on profit okay and that’s why I asked 09:56 you guys to specify whether costs are 09:59 fixed or variable here okay so that’s 10:01 what that was for read more about that 10:03 like I said you’ve got the chart down 10:06 here pretty straightforward just an 10:08 illustration of what happens month by 10:10 month based off of your forecast you’ve 10:12 got the Green Line is revenue and then 10:15 you’ve got your different categories of 10:16 expenses here you can see how they rise 10:18 and fall in total and by categories so 10:22 one little extra bonus that I like to 10:26 add to my industry specific spreadsheets 10:29 is this likely best case worst case 10:33 scenario okay I think this is super 10:36 valuable you know and it’s it is another 10:39 step and the whole strategic planning 10:43 thing which is time-consuming in that 10:44 bed really is just the like I said the 10:50 plus one however you want to put it to 10:53 to the operating budget this is where 10:56 you know you’ve done you’ve been in put 10:58 your 10:59 expected revenue cost profit etc now you 11:02 get to toy with what the worst case 11:04 would be in the best case would be and 11:06 this just like most of strategic 11:08 planning 11:09 just get your mind working in that 11:10 direction so you’re you’re completely 11:14 comprehensively prepared for the 11:15 upcoming year okay so it starts off here 11:19 with the pro forma income statement 11:26 that’s what this is sure if it Proform 11:28 in there but yeah it’s a pro forma 11:31 income statement or rather this yeah 11:35 sorry okay so this is revenue up here 11:37 where you can toy with best cased amount 11:40 for each revenue source 11:45 worst case amount or you can just use a 11:48 generic multiplier okay so basically 11:52 what that means it’s like if I change 11:53 this worst case is gonna be negative in 11:55 the case of revenue the 15% you’re gonna 11:59 see these worst case amounts decrease 12:03 okay because I made the worst excuse me 12:08 in the worst case that much worse 12:10 okay but you have so you can change that 12:15 there it will affect everything in that 12:17 section but you also have the ability to 12:20 override it okay so see if we delete 12:25 this worst case would be 38,000 versus 12:31 42,000 for trust investments in the 12:34 quest but you know say you think no no 12:38 worst case could be worse than that or 12:40 worst case wouldn’t be quite as bad well 12:43 then you just override that amount okay 12:46 everything else is based off of this 12:48 multiplier but now you’ve overwritten it 12:51 with an amount so same same principle in 12:55 the best case I’d come down here to 12:58 expenses we have our abroad expense 13:00 categories again use a multiplier this 13:04 is just a ballpark figure the multiplier 13:06 basically if you know best-case in the 13:10 Fuhrer expects is going to be the 13:11 decrease 13:12 worst case for expenses gonna be the day 13:15 increase and I keep doing it 13:17 so keep that in mind and you can 13:20 override you don’t like what you see so 13:22 yeah just toy with it you know that’s 13:25 the whole point of this exercise just 13:28 toy with it see what playing with 13:32 different scenarios gives you what it 13:35 makes you think about what you might do 13:37 to plan to avoid a worst case what you 13:39 what planning you might do to take 13:41 advantage of the best case okay so just 13:44 like the pro forma income statement on 13:45 this executive summary 13:47 you got your operating profit here you 13:50 can see negative under worst case this 13:54 will match what’s on the executive 13:55 summary the ten thousand twenty eight 13:58 operating profit and best case 14:05 considerably better six times the 14:07 operating profit so that’s pretty good 14:10 it brings in interest income and expense 14:14 here also and then that profit always 14:20 calculated the exact same as it is on 14:21 the executive summary so then of course 14:25 the you know the whole purpose of ratios 14:26 is to kind of put amounts into 14:31 perspective from your financial 14:34 statements and the same thing takes 14:36 place here you know profit margin can 14:38 range from negative seventeen point 14:41 eight to twenty seven positive twenty 14:43 seven point two times interest earned 14:45 degree of financial leverage is going to 14:48 change all that it’s gonna going to 14:50 change based off of what you enter in 14:52 the best case in worst case fields above 14:57 some anyhow that’s quick rundown of the 15:01 church operating budget template you 15:04 know go get your own copy to toy with I 15:06 get his follow the link and there’ll be 15:10 a links on there follow a link to the 15:13 post there’ll be links on there to 15:14 download your own copy of it and then 15:16 you know you if you’re dealing with 15:18 concepts you’re not familiar with just 15:20 check out the post I’ve got more or less 15:22 every single field on here 15:24 addressed in there and you know if you 15:28 get stuck on something just check that 15:30 out and it’ll help you make sense what 15:33 you’re looking at so appreciate you 15:35 guys’s time appreciate you watching this 15:39 video if you have until this point the 15:41 very end YouTube it is a popularity 15:45 contest just like anything on the 15:47 Internet and if you like this video if 15:50 you think this seems like something 15:51 useful to you best way to let me know is 15:55 to either leave a comment down below or 16:00 better yet maybe I don’t know depends on 16:03 the YouTube algorithm comments are good 16:06 likes or good subscriptions are good I 16:08 know 16:10 alerts are good any of that stuff you 16:13 know I’ll feedbacks good I’ll crank out 16:16 more content there’s also a lot of stuff 16:19 to check out not just for churches but 16:22 for small businesses in general on 16:23 spreadsheets for business comm thanks 16:26 you guys take care
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Categorize and list detailed expenses
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Operating budget example for small churches, big churches, and every church in between
This is the second post on church budgeting and the fifth overall on church strategic planning.
Previously, the capital budget for the church was covered in depth. This post will focus on the operating budget. The capital budget, if you’ll remember, is the budget that the church completes for every potential project it plans to take on in the coming year. The operating budget consists of a forecast of revenue and expenses for the coming year. The culmination of the operating budget is a pro forma (or expected) income statement.
After completion of the capital budget and the operating budget, the church will be ready to tackle the financial budget. The financial budget will be covered in the next post.
What is an operating budget for a church?
An operating budget allows a church to be proactive regarding its revenues and expenses for the coming year. It allows the church to plan accordingly and to be ready for any scenario that might come its way. Doing so will allow the church to better meet its mission.
Information gleaned from the mission statement, SWOT analysis, strategy formulation, and capital budgeting will all play a part in preparing the Operating Budget for the coming year.
Creating an operating budget can be as simplistic as writing down a guess about how much revenue the church will make in the coming year and the number of expenses it will incur. This is better than nothing.
Dedicating some thought to each revenue source and each type of expense, plus estimating how they might rise or fall over the course of the year helps to paint a more accurate picture of the church’s financial position. Additionally, using the Spreadsheets for Business church operating budget template will give you the ability to not only estimate what the most likely scenario to play out next year will be, but will also help you to plan around a best case scenario and a worst case scenario.
Download the template by filling out the form at the top of the post.
How much time and effort should be dedicated to a church operating budget?
Any amount of planning is better than no planning. There is, however, such a thing as over-planning – AKA, paralysis by analysis. The sweet spot is somewhere in the middle – enough planning for you to feel confident that your church is in a position to thrive in the coming year.
The amount of thought you dedicate to each item in this church operating budget example is up to you. I urge you not to overthink it. However, after going through the following steps, I think you’ll find yourself rather confident about your church’s future going into the new year. With some of the worry off your plate, you can focus on other areas that will help your church achieve its mission.
How might an operating budget for a church differ from a for-profit business?
Fortunately, creating an operating budget for a church is much less complicated than for, say, a manufacturing company.
When creating an operating budget for a manufacturing company, you start with revenue and work your way through budgets for materials, labor, overhead, production, and a lot of other inputs.
When creating an operating budget for a church (which is essentially a service) some of that complication can be avoided.
Should you start with budgeting for revenue or expenses?
Personally (and maybe this is due to my background in budgeting for manufacturing organizations), I still think it’s smart to start budgeting with revenue. That way, you know how much you expect to make in the coming year and can plan your expenses around that information.
However, there’s also a school of thought, particularly by Aubrey Malphurs and his organization, that claims you should plan your expenses first. Then, you know how much you need to bring in to cover those expenses. Aubrey is much more of an expert on church operations than I am, admittedly. I can see the rationale behind this school of thought.
You should start with whichever you’re more comfortable with – expenses or revenue. I imagine as you get deeper into the process of forecasting, that you’ll be bouncing back and forth between the two anyway. So, ultimately, what you start with won’t matter. Unlike a manufacturing company, the levels of your revenue and expenses won’t necessarily affect each other. All that matters is what you end up with.
Look, your budgets are never going to be exactly right. That’s fine. What’s not fine is going into the coming year with a church that is at risk because you haven’t dedicated adequate thought to what the coming year may bring.
An operating budget won’t guarantee that your church will be successful. That’s why you shouldn’t spend every waking second working on it. It’s just a matter of giving appropriate thought to the matters of revenue and expenses.
The Pareto Principle states that 80% of outputs come from 20% of inputs. If you buy into this – 80% (or so) of the benefits of creating an operating budget for your church will probably come from the first 20% of the time that you spend on it. What this means, of course, is that by merely dedicating a tiny bit of thought to these matters, your church will reap big benefits.
How to create an operating budget for your church
Operating budgets look complicated, but at their core, they’re fairly simple. All you’re going to be doing is estimating your expenses, estimating revenues, and then filling in a couple of other details. There are no wrong answers. As a steward for your church, you’re in a better position to answer these questions than anybody else on Earth.
Let’s get started!
Your church’s expenses
Obviously, your church has costs that it incurs to provide needed support to its membership. Again, I have to give credit to Aubrey Malphurs for the framework of how expenses are grouped together.
Expenses are grouped into four broad categories: evangelism/missions, personnel, ministries, and facilities.
Within each broad category, each Expense is broken down into more specific categories and beyond that, into greater Detail.
So, depending on how organized your accounting is, you should be able to (hopefully) begin by breaking your existing expenses down into these four broad categories. Once you’ve done that, then you can begin to group similar expenses by subcategories. Then eventually, of course, you want to budget for every detailed expense.
Classifying expenses as fixed or variable
Along with every Expense in a subcategory, you’re going to classify it as fixed or variable. This sounds like a pain in the rear, but it’s good to understand the nature of each cost.
Fixed expenses, as the name implies, don’t change with revenue. They’re going to be the same whether you have a very busy year or a year where you just sit around twiddling your thumbs. For example, salaries are fixed and insurance is fixed. Any other expense which will be the same month after month, over the course of the year, is fixed.
Variable expenses, on the other hand, change. They typically change based on the level of revenue. If revenue goes up, variable expenses also go up. If revenue goes down, variable expenses would probably go down. For example, expenses related to outreach and local mission work might depend, in large part, on the amount of revenue received. So they can probably safely be classified as variable.
There’s no right or wrong answer when it comes to classifying your costs as Fixed/Variable. Some will be obvious, while others…not so much. Again, don’t dwell too much on this classification. Give it a little thought and select what you think is appropriate. The only real effect is on some of the ratios that are calculated once the budget is completed. You can always go back and change your classification.
Use the past to plan for the future
You can refer back to historical amounts, of course, to help with the forecasting of future expenses. In fact, that’s probably a very smart thing to do. Looking back at historical amounts paid will also help you to determine if an expense is fixed or variable.
If this is your first time completing an operating budget such as this, then I would suggest that you still break each expense down into broad categories (evangelism/missions, personnel, etc.). But, maybe don’t break them down into too many subcategories (district & synod support, convention assessment, etc.). And, definitely don’t overdo it breaking expenses down into detailed categories (detail expense 1, detail expense 2, etc.). You can always go into more detail next year.
On each of the broad category budget worksheets, you’re going to start at the top and list each Expense subcategory. Also, pick either Fixed or Variable from the drop-down menu.
In the bottom section – this is where you’ll break the subcategories down into detailed expenses. All of the detailed expenses will sum for the month and that amount will be carried back to the top
Let’s look a little deeper into each broad category.
Evangelism/Missions Budget
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The Evangelism/Missions Budget is where you’ll classify expenses related to efforts directed externally from the church to reach individuals who likely aren’t members.
Next, go to the detail section and itemize the subcategory expenses. Additionally, start forecasting month by month for the whole year. Each subcategory will automatically add all the detailed expenses.
You’ll see that a Total for each month and for whole the year is calculated. These amounts will carry over into other worksheets.
Personnel Budget
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The Personnel Budget is pretty self-explanatory. This is the money planned to be spent on the individuals who help run your church.
Expenses such as salaries, fringes, utilities for housing, and guest pastors/speakers would be entered here.
Ministries Budget
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The Ministries Budget is where you will enter expenses directed toward the individuals that are already a member of your church.
You know the drill by now – enter the appropriate subcategories and then the names and amounts for the detailed expenses.
Facilities Budget
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The last category of expenses is also pretty self-explanatory. A Facilities Budget includes those expenses that are required for your church, as a whole, to function.
How do you differentiate if expenses are for personnel or facilities? Easy, if the expense is, more or less, for one employees’ benefit then it’s probably a personnel expense. Conversely, if an expense is for everybody’s benefit then it’s probably a facilities expense.
As mentioned before, this is all somewhat subjective. There are no right or wrong answers, per se. Trust your gut, trust your experience, and classify expenses in whatever way makes the most sense to you.
If you’ve been following along closely, you’ll notice a special expense listed under the maint and repairs subcategory.
In the capital budget, we examined the feasibility of adding on to the church’s parking lot. Ultimately, based on the expected cash inflows and cash outflows, it was determined that making an addition to the parking lot was in the church’s best interest. So, in our hypothetical church, that project will be undertaken and will need to be included in the coming years’ operating budget. You’ll see detailed expenses related to the parking lot under the maint and repairs subcategory and the depreciation subcategory.
Don’t solely rely on what you spent in the past to create a feasible budget going forward into the future. Make a note of anything that might change and of any new expenses that might be incurred in the coming year due to projects approved in the capital budgeting phase.
How much revenue will you need to cover those expenses?
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Estimating expenses is a bit depressing. But now we get to tackle the fun part, and that is estimating revenue.
Revenue also has subcategories, but they are not broken down into detail.
By now, you know the routine. In the Revenue Budget, enter the start date for your budget in the cell D9.
You’ll see that the Revenue Source column is already populated but you’re welcome to change the descriptions as you see fit.
For each month and each Revenue Source, enter the forecasted amount of revenue. A Total for the months and for each Revenue Source will automatically be calculated.
Maybe you’re baffled as to how to forecast revenue. Offerings and donations are probably at least somewhat consistent. But, other sources of revenue like facilities use charges and trusts, investments and bequests are difficult, if not nearly impossible, to accurately predict.
First of all, I’ll say the same thing I did when it came to forecasting expenses, and that’s to just come to terms with being wrong in the first place. The value in this, again, is to dedicate a little bit of thought to it.
Spreadsheets for Business has a free tool that can help you forecast revenue (or expenses, or anything really…) accurately and it can also help you gain insights into what drives revenue.
Once the information is entered into the Revenue Budget, then you are very nearly done with the operating budget.
The church’s Pro Forma (expected) income statement
After completing all of the expense budgets and the Revenue Budget, you should see a nearly completed Pro Forma Income Statement. All that’s left to enter is information about interest.
If your church keeps funds in an account that pays a reasonable amount of interest, enter what you might expect to earn this year in the Interest Income field.
On the other side of the coin, if your church borrows money, then you will likely have Interest Expense over the course of the year. That amount in the Interest Expense field should be added as a negative amount.
Now you should have a pretty reasonable idea of what the coming year will look like from a revenue and expense standpoint. Notice that each of your expense categories has the amount as a percentage of Total revenue listed next to it. This gives you an idea of how your expenses are weighted.
For reference, Aubrey Malphurs recommends the following weightings:
Evangelism/Missions 10%
Personnel 40%
Ministries 25%
Facilities 25%
Obviously, your church doesn’t have to have this exact percentage for each expense category. But it simply gives you a benchmark to measure your church against.
All the calculations in the Pro Forma Income Statement are pretty straightforward. Operating Profit is Total Revenue –Total Expenses.Net Profit is what’s left after Interest Income and InterestExpense are accounted for.
Ratios and chart
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Now we’ll look at some very basic ratios to put the Operating Budget into perspective. These ratios were designed for, and are primarily used by, for-profit businesses. But even though a church operates differently than a for-profit business – especially a manufacturing company – they still might provide a little insight and perspective for the church leaders to use in decision making.
Profit margin
Profit Margin is pretty straightforward. It’s just Net Profit ÷ Total revenue. It shows you, in percentage terms, how much revenue you bring down to the bottom line.
Times interest earned
Times Interest Earned is a ratio that focuses on your ability to cover your interest payments.
Obviously, if an organization borrows money it needs to be able to meet the additional obligations placed upon them. So Times Interest Earned shows you, by taking Operating Profit ÷ Interest Expense, how many times over your church can cover its Interest Expense.
Degree of financial leverage
The Degree of Financial Leverage shows the amplification that borrowing money can provide to profits and losses. So, for instance, in the example operating budget, the Degree of Financial Leverage is 1.4. This means, at this level of borrowing, that for every 10% change in Operating Profit, Net profit would increase by 14% (10% × 1.4).
That sounds great, but the opposite is also true. If Operating Profit declined by 10%, then this level of borrowing would cause Net profit to decrease by 14%. That’s the nature of leverage. It amplifies gains and losses.
Most people can pretty easily grasp the nature of financial leverage.
If you borrow money and get to keep the gains from the borrowed money, then financial leverage is great. If you borrow money and your investment loses value, then you not only have the loss to deal with but you also still owe for the money you borrowed.
Degree of operating leverage
What’s not so easy to grasp is the benefits and detriments of other fixed costs, besides interest payments. The Degree of Operating Leverage quantifies the benefits and detriments of incurring fixed costs.
Why are fixed costs so important? Well for lack of a better answer – because they’re fixed. You are going to pay them anyway. So, if fixed costs really help you ramp up your operating profit, then that’s great. Because fixed costs aren’t going to increase on you.
The inverse is also true. Since fixed costs don’t change, you still have to pay them even if they are dragging operating profit down.
The Degree of Operating Leverage tells the same story as the Degree of Financial Leverage in the sense that it tells you how much greater Operating profit (not Net profit per se) would have been in the absence of fixed costs. This ratio really starts to get into detailed management accounting. That amount of detail is probably beyond the scope of this post, but since it’s included in the Executive Summary, I wanted to touch on it briefly.
In the example workbook, the Degree of Operating Leverage Is 10.2. This means then that a 10% increase in Total revenue, everything else being equal, would translate to a 102% increase in Operating Profit. Obviously, you know what that means if Total revenue went the other direction. It means that a 10.2% decrease would put Operating Profit in the red.
More about degrees of leverage
There is no good or bad Degree of Financial Leverage or Degree of Operating Leverage. It’s simply a reflection of the way your costs and borrowing affect your income statement. Leverage is great if Total revenue and Operating Profit are increasing. Leverage is bad if the outlook for the coming year is bad. So if your leverage is high and you’ve got concerns about your ability to bring in revenue for the coming year – then you’d better start looking to reduce fixed expenses and Interest Expenses.
Finally, at the bottom of the Executive Summary, you’ll see a handy chart that will illustrate the level of revenue and expenses (broken down by broad category) for every month in the upcoming year. This allows you to visualize how all these factors, which affect the financial health of your church, are expected to fluctuate throughout the year.
Plan for every scenario your church might face
Say that creating a simplistic operating budget is working at level 1 out of 10. Completing the Spreadsheets for Business operating budget template takes you up to 7 out of 10. This next section is what will push your church up to a 10 out of 10.
On the Likely-Best-Worst Scenario worksheet, you’ll see all the information pulled in from your Pro Forma Income Statement and the subsequent ratios under the Most Likely Amount column. But, what you will have the opportunity to do here, is to imagine multiple scenarios – some good, some bad. You’ll get to picture what your Pro Forma Income Statement will look like in the best-case scenario and the worst-case scenario.
Better or worse than expected revenue and expenses
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To use this valuable worksheet, all you need to do is start with a multiplier for the best case and worst case. Obviously, the best case for revenue is going to be a positive percentage, and for expenses, a negative percentage.
On the other hand, of course, the worst case for revenues is going to be a negative percentage, and for expenses, a positive percentage. Here, you are going to have the opportunity to play around with positive and negative future outcomes, and see what feels right in terms of multipliers for revenue and expenses.
But beyond simply entering a Best Case Multiplier and a Worst Case Multiplier for revenue and expenses, you can also refine the scenarios even further. You do this by entering specific amounts in the Best Case Override Amount and Worst Case Override Amount.
What are override amounts?
It means that you can tweak the dollar amounts for revenue and expenses even further. For instance, maybe you hope that your church might be blessed with an extraordinarily high amount of revenue from trusts, investments or bequests. You can thus enter a specific amount in the Best Case Override Amount for whatever would constitute the “best case” for your church.
On the flip side, say you know that, potentially, the worst case scenario for facilities expenses is that you need to replace the church HVAC system. So, you enter an adjusted amount in the Worst Case Override Amount for facilities that reflects this added expense.
You can also tweak the override amounts for Interest Income and Interest Expense.
At the very bottom, you’ll see the effect on the ratios from the Executive Summary based on what you entered for the Best Case and Worst Case Multipliers and Override Amounts.
There’s an old saying that goes, “hope for the best, but plan for the worst”. With this scenario planner, you’re able to do just that. You’re able to protect your church from contingencies while being prepared to act accordingly if the coming year is full of blessings.
Church operating budget
Maybe all of this seems overwhelming. That’s understandable if you’re not accustomed to planning with this level of detail. Again, I urge you (as the creator of this “overwhelming” budgeting template) to not overthink it.
What I do urge you to do however is to download the template at the top of the post – and to boldly use it.
Go over it once, quickly filling in the information you have handy, then walk away from it. After that, come back to it, look at it, reflect on what you’ve already entered and make any changes you feel are necessary. Then walk away from it again.
This is (for lack of a less cliched term) “a living document”. It is designed to take the relatively simplistic information of your forecasted revenue and expenses and to do the hard work of providing valuable output. That will allow you to be proactive for the coming year and give you confidence as a leader of the church. It can help your church not only stay financially solvent but also fulfill its mission and achieve its goals.
What other (sub) categories of revenue and expenses would you include?
What percentages and amounts would your church enter to prepare for worst and best-case scenarios?
I write as thorough of content as I can about the subjects I cover. I also have a lot more helpful posts that I want to write.
But once I’ve written all those posts, there will still be other valuable resources out there. I’ve built my material off of some of these great resources and someday, if I’m fortunate, somebody will use my material to create content that’s even better than mine. And so it goes…
I still have to cover operational budgeting and financial budgeting in my series on church strategic planning. In the meantime, however, I thought it would be helpful to point you toward some other resources for church strategic planning that I’ve found helpful when putting this material together.
I hope these resources will make your church’s strategic planning task more efficient and will help fill in some of the gaps in my material.
Not all of these will revolve specifically around churches. In fact, most will be geared toward for-profit business. Don’t let that discourage you though. A lot of the principles are the same no matter what industry you’re in. Plus, it can be helpful to look at things from a different perspective.
This is a good resource to get you warmed up for drafting a mission statement of your own. Ideas might come more naturally to you once you’re in a “mission statement” mindset. You could be browsing this site while you’re brainstorming on your church’s mission statement.
This site displays mission statements for companies big and small across many diverse industries. Plus, there are mission statements for non-profits, schools, and even personal mission statement examples.
Oh yeah…there’s example church mission statements too! Remember when I mentioned in my mission statement post for churches, you can search the web for “[insert state here] church mission statement” to give you ideas? Well, before you spend all that time and effort, check out the dozens of examples here.
Each mission statement is rated by users. Think about why some might be rated higher than others. Jot down some notes about what you like and what you dislike.
With the diverse array of examples, you should have a general idea of what constitutes an inspiring mission for your church. That, coupled with everything else you know about drafting an effective mission statement should help you nail this step of the strategic planning process.
ChurchConsultants YouTube – Developing a church’s mission statement
If you’ve done any searching online regarding church strategic planning you’ve come across Aubrey Malphurs and/or Chuch Consultants.
I’ve referred to Aubrey’s content frequently as I’ve put together my own strategic planning posts. I figure Aubrey has more hands-on experience than I do in this arena (particularly in the “soft skills”). So I appreciate what he’s put out there.
This video is very short, but it offers some good tidbits on drafting a church mission statement. For instance, I like the emphasis on keeping it short while also stressing the importance of detailed language.
This is not the most coherent page ever. I get the impression that this site is run by a non-English speaker. Which is fine, but you’ve just got sort through some non-sensical material to get to the good stuff.
Nevertheless, if you’ve got the patience, there is some good food for thought here. I particularly like the downloadable (Word) template. It gives a lot of great examples of strengths, weaknesses, opportunities, and threats. Also good is the 2×2 matrix that outlines how the four components of the SWOT analysis can interact with one another.
This is another site that gives a lot of great examples of factors to consider when doing a SWOT analysis for your church.
In particular, I like the use of the USED acronym for each component of the SWOT. E.g. How can we:
Use each Strength? Stop each Weakness? Exploit each Opportunity? Defend against each Threat?
Also, RapidBI provides a thorough example of a SWOT analysis. It’s for a for-profit business, not a church, but it gives you the opportunity to see one in action.
Strategy formulation
Reference for Business – Strategy Formulation benefits
I like the focus on the first step about defining your organization. In particular, I think that the emphasis on the customer (member) makes some really good points.
The post also raises the important point of managing the implementation of a strategy. Drafting a solid strategy is fine and good, but if it can’t be acted upon it really has no value. If Reference for Business has more content on the subject, I wish they would have linked to it.
This well-formatted and well-written post focuses on the competitive sub-strategy. This is especially valuable for churches. While a lot of people will be bound by their preferred denomination, there are others that are not. Understanding how to best position your church and make it stand out can help you get people in the door and in the pews.
Marketing MO emphasizes the need to understand what your organization’s identity is. You need to carve out an authentic niche and not try to be everything to everyone.
They go on to provide steps that your church can take to solidify its competitive position. These steps include defining your market, clarifying what value you’re providing, looking at the competition, and pinpointing where you want your church positioned in a complex environment.
Capital budgeting
University of Florida – Capital Budgeting for a New Dairy Facility
What in the world do church management and dairy farming have in common? Admittedly, not much. But, when it comes to capital budgeting, both industries (in fact, all industries) should approach it in the same way.
This document goes into tremendous detail about all of the considerations that must be made when preparing a capital budget. One thing, in particular, I like is the suggestion that “what-if” analyses be run. Using a spreadsheet to make a capital budget makes this easy. You can simply make a copy of the original file and then start playing around with all the numbers. See what happens to the NPV if cash flow amounts and timing are changed. Make a best-case, worst-case, and most likely scenario so that your church can have a plan no matter what ends up happening.
Another great point that the author of this document makes is that the drivers of cash inflows and outflows should be considered. Sometimes thinking about the cause and effect can help in making more accurate forecasts. It can also help to serve as a reality check and to provide context to a situation.
Drivers are the factors that influence the amount of cash coming in or going out. An example cited in this document is using herd size, milk sold per cow, and the market price of milk as a driver for the amount of revenue received from the sale of milk. In other words, milk revenue is a function of these three variables.
Operating budget
AAUP Wiki – The Operating Budget
Link (Note: as of the time of this writing this link was broke. If that link won’t work, try this)
I haven’t been able to find many quality resources for church strategic planning related to operating budgets.
This document is written for managers in the printing and publishing industry. It’s certainly not a bad source of information, it’s just that since it’s written for a manufacturing organization, there are few parallels that can be drawn with church management.
Nevertheless, it is a detailed document that walks through the steps necessary to prepare a comprehensive operating budget. One aspect I really like is the emphasis on engaging those lower in the hierarchy when putting together forecasts for expenses. The people who work with these expenses day in and day out can provide valuable input when it comes to understanding how these costs might change over the coming year.
Financial budget
Amergy Bank of Texas – how to prepare a cash budget
A bank understands that cash flow is the lifeblood of any organization – regardless of industry. This is a relatively short and simple PDF that walks readers through the process of creating a financial (cash) budget.
Financial budgets share a similar format no matter the industry. So, while the example used in this PDF isn’t for a church or non-profit, the principles are the same.
Not only is step-by-step guidance provided, but definitions are also given, and help in analyzing the cash budget once it’s completed is made available at the end of the document.
Wrap up – resources for church strategic planning
I strive to provide the information and tools I would want if I were in your position. What I would want or need might not include everything you would want or need, though. Fortunately, a lot of other people have produced material on these subjects (some of what’s been created is actually useful!). Just know that it might take a bit to wade through the superficial and unauthentic material to get to the good stuff.
I hope that these additional resources for church strategic planning will help fill in any gaps that are left after reading my posts. If there’s something you’d like me to cover in more detail – leave a comment and I’ll take it into consideration.
A church capital budget helps you assign values to projects and prioritize which projects should move forward
The costs of assets, expected benefits (revenue), and ongoing cost (savings) help determine the viability of a project.
Net present value (NPV) and the profitability index (PI) are the primary outputs of church capital budgeting. Other outputs can help paint a picture of project desirability too.
Church capital budget explained
Now we’re getting into my wheelhouse.
Like I said before, I don’t pertain to be the greatest guru of the soft skills (mission statement, SWOT analysis, strategy formulation) covered previously. But now…now we’re breaking out the spreadsheets, and I can promise you that I can help you solves some problems when it comes to finances.
Church capital budget template download
Want to play around with the example used in this post?
Complete the form below and click Submit. Upon email confirmation, the workbook will open in a new tab.
What is a church capital budget?
You might not know what capital budgeting is. That’s fine. When the average person hears the word “budget” they think of what money comes in during the month (sales, income, contributions) and what money goes out that same month(expenses). That’s an operational budget and we’ll cover that in a little bit.
Capital budgeting is the process by which an organization chooses which long-term projects to invest in. In a business setting things such as the time value of money, depreciation, and taxes are taken into consideration.
Capital budgeting for churches vs for-profit businesses
When conducting capital budgeting for business, projects are typically ranked based on their forecasted profitability. The projects that are thought to be the most lucrative are usually prioritized.
However, since churches are nonprofit, we’re going to have to attack this from a slightly different angle. Some projects might bring in more members and therefore more money. Other projects might help to achieve the church’s mission, but not bring in a dime. If that’s the case, we’ll have to consider other types of value besides cash money.
Capital budgeting is designed for for-profit organizations. However, with a little creativity, we should be able to tweak the process so that your church can use this powerful tool too.
You’ll be able to quantify what you foresee the expected returns to be on the big projects you want to undertake. You’ll be able to rank projects and choose how you employ your scarce resources. Best of all, you’ll be able to make wise decisions that will lead you closer to achieving your mission.
How to create a church capital budget
Big goals sometimes require big projects
Taking into consideration all of the previous steps you’ve completed in the strategic planning process (mission statement, SWOT analysis, and strategy formulation), think about what large-scale projects will need to be undertaken in light of your future plans.
Some things have probably already come to mind. Don’t systematically dismiss a particular project just because it seems infeasible. The point of the capital budgeting process is to make it obvious what projects you should pursue. So, all you’re sacrificing by running a project through this process is a bit of time.
Ultimately, you’ll want to select your projects and move on, so you can’t let this step drag on forever. But, if a project potentially plays an important part in your strategy or would help you achieve your mission, then, by all means, give it its time in the sun and then decide if it’s feasible or not.
With a list-in-hand of the projects you want to explore, let’s move on to crunching numbers.
By the way – all of the numbers you input into this workbook can be changed. So don’t overthink/over stress about any of this!
What church project will we be using as an example?
For the example used in the screenshots, we’ll keep it simple. The project will be a parking lot addition.
Our hypothetical church is seeing that membership has outgrown its existing parking resources. Many members are forced to park on the street during service. Additionally, the church leaders hope to keep the recent rate of growth up and they want to provide their members with plenty of room to park.
In light of this, they have decided to use some of their undeveloped land to add an additional 52 parking spaces.
Disposing of assets – is something being replaced?
If you’re replacing an old asset with a new one then you’ll have to input some information about the old asset. Why? Because even though an asset is being replaced, cash flow in the present and future can be affected. It’s cash flow that gives us your net present value (NPV) and NPV is how you (mostly) prioritize new projects.
*If this is starting to get too technical for your taste – hang in there. These terms will be explained in a simplified manner. Leave a comment if you have any questions.
Fortunately, for a church, the only thing we need to know about the old asset is what it can be sold for today. Since churches don’t pay taxes, none of the other information matters. Not even the original cost. Why? Because it’s a sunk cost.
So, if the old asset can be sold for cash, enter a value in the Current market value of old asset(s) field.
Disposing of assets – church parking lot
In our example, something new is being created. There’s nothing old to dispose of. Even if we were replacing an existing parking lot – old parking lots don’t have much value to anyone else.
So, in this example, the Current market value of old asset(s) is $0.
If, when you’re analyzing your church’s capital projects, you have an existing asset that might be worth something – enter the market value here. Whatever you can sell the old asset for will help offset the cost of the new asset. This will help increase NPV.
What is a sunk cost?
Sunk costs can be tough for people to grasp and even tougher to act upon.
A sunk cost is one that’s already been incurred and should have no bearing on future decision making. Meaning – the cash has left your hands and there’s nothing can be done about that anymore.
That’s not always how people feel emotionally, but from a strictly logical standpoint – it’s true. Money spent in the past is already gone. It cannot be unspent. Only cash flows in the present and future matter.
So, if you find yourself making decisions (in your personal life or on your church’s behalf) based on the money you’ve spent in the past – you need to stop and check yourself. Realize that nothing you do now can fix those mistakes. Base your decisions on what you can control now and in the future.
Initial cash outlay
First and foremost, what’s the new asset going to cost?
Include every expense that will need to be incurred to get this asset into service. Taxes, fees, shipping, labor…everything. These extra costs can add up and can significantly affect your decision making, so be sure to include them all.
Enter the grand total into the Cost of new asset(s) field.
Initial cash outlay – church parking lot
In our example, we’re estimating the total costs to be $208,000.
This will be enough to cover not only the parking lot itself but the design and ancillary costs too.
What will the salvage value of that new asset be?
Thinking about what your brand new asset might be worth when you’re done with it might seem silly. It’s so far in the future – and so hard to guess at, why bother?
Well, it is far into the future and you really can’t know what it’ll be worth. But, it will matter. Especially if it’s a higher-cost asset. Even if it will have no value in and of itself, will the scrap be worth something? Will your church be able to get anything out of this asset when it’s reached the end of its useful life?
You’re not going to be exactly right about what it’ll be worth, and that’s fine. Here’s a little trick to get you in the ballpark – start out with a number that’s absurdly high. Then, come up with a number that’s absurdly low. Start working your way back from the high number and up from the low number. When you feel like you’ve reached something feasible – go with it.
If you can’t settle on one good number then average the two numbers out if you need to. Just make sure you’re comfortable with the number when you’re done. It’s always best to be more conservative with forecasting than liberal. This gives you a margin of safety.
Once you’ve got your number, enter into the Salvage value of new asset(s) field.
Salvage value – church parking lot
Again, parking lots aren’t really worth anything to anybody else. So, unfortunately, we’ll have to enter a salvage value of $0.
What is the new asset’s useful life?
An asset actually has two different life spans. A depreciable lifespan and a useful lifespan.
What’s the difference?
An asset’s depreciable lifespan is the number of years an asset will take to be “written off.” Depreciation is a concept created by accountants. What it does is spread the cost of an asset over many years rather than having it hit only one year.
For example, say a company bought an asset for $50,000 with a depreciable life of 10 years. Rather than having that expense hit the year of the purchase, they would charge $5,000 to their income statement for the next ten years. The cost is spread out – not swallowed all at once.
Confused? No worries. Since you’re doing capital budgeting for a church, and aren’t subject to income taxes, you don’t have to worry about depreciable life (at least as far as the capital budget is concerned).
Okay…what about useful life? Well, depreciable life is for accounting in income statements. It’s roughly accurate but doesn’t really have any correlation to how long an asset can really be used. An asset’s useful life might be shorter or much longer than its depreciable life.
It can be hard to say how long an asset might really be useful. But, you have to put forward your best guess. I usually recommend that forecasts err on the conservative side.
Since a longer useful life will mean a higher value, I suggest you enter a value in the Useful life of new asset(s) in years that is on the low side. Start at 1 year (if an asset has a useful life of less than a year, it probably doesn’t belong in the capital budget) and work your way up. Once you hit a number that isn’t on the absurdly low side, you’re probably pretty close to a nice and conservative estimate.
Useful life – church parking lot
A quick Google search reveals that the expected useful life of a paved parking lot is 10-15 years. Since our example church wants to get the most out of its investment, we’ll enter a useful life of 15 years. This will require a commitment to proper maintenance and will cause the church to incur additional costs – which we’ll address later.
How much of a return does your church want on its capital projects?
Time, money, and other resources are limited. Not just for you and your church, but for everyone.
In order for a project to “make sense,” it has to eclipse a minimum acceptable rate of return.
For instance – if your church was presented with the “opportunity” to invest $1,000 and you were promised $1,050 in ten years, you would probably pass. Why? Because it’s just not worth it to tie up that $1,000 for a decade and to only receive 5% (about .5% per year) back for doing so. That money could be used for something more worthwhile now.
So, you might not know exactly what your hurdle rate (minimally acceptable rate of return) is, but you probably know it’s more than .5%.
If your church borrows money, keep in mind what you’re interest rate is – you’ll want your hurdle rate to be at least that much. Otherwise, you’re not getting a good return on investment on that borrowed money.
Other than that, I can’t say what your hurdle rate should be. This is a very subjective thing. Every church will be different.
I would recommend that you undertake the same exercise I suggested for determining the useful life of the asset – start at 1% and work your way up. Once you say “okay, I suppose I could live with that return,” then you’re probably in the neighborhood of a practical hurdle rate.
If you want to be a little extra conservative (and I would recommend as much) then go ahead and tack on a little extra to your rate. For instance, if your hurdle rate is 5%, maybe up it to 5.5%. If it’s 8% consider increasing it to 8.8%.
This tiny increase puts just a little more pressure on your projects to perform better in order to be accepted.
When you’ve finally settled on a hurdle rate enter it into the Hurdle rate field.
Hurdle rate – church parking lot
The rule-of-thumb is – the riskier the project, the higher the hurdle rate.
A parking lot might not seem like a particularly risky project. But, as you’ll see, justifying its construction is contingent upon church membership continuing to increase. That might seem likely for our example church, but it’s no sure thing.
An 8% hurdle rate seemed reasonable under the circumstances. However, that was bumped up to 8.8% to provide a little more room for error on the part of the projected cash flows.
The most important part of a church capital budget – the forecasted cash flows
As I’ve mentioned before – investments are defined, ultimately, by three variables. Cash in, cash out, and time. Notice I said “cash.” Not sales, not promises, not receivables.
Cash.
This step involves all three variables. Cash flow out, cash flow in, and the timing of each.
Cash outflows
Most projects will incur more costs than those required up-front. Many times costs are necessary as a part of the ongoing project.
The types of costs can vary. Here are some ideas for ongoing costs that a church may incur as a result of undertaking a new project:
wages and fringes
maintenance
utilities
supplies
insurance
interest
leases
advertising
And on and on…
I cautioned you to not overthink any of these steps earlier, and I stand by that. However, make sure you think this part through thoroughly. Overlooking expenses and not including them in your church capital budget can make a project look more attractive then it actually is. You don’t want to be ten years into a project and realize that there were expenses you never accounted for.
Next, think about the timing of the expenses. Are they monthly, weekly, yearly, or erratic? The capital budgeting worksheet is set up to look at cash flows yearly; not monthly or weekly. So, if monthly or weekly cash flows are expected, you’ll have to multiply them by 12 or 52 respectively.
Finally, keep in mind that costs tend to rise over time. A capital budget forecasts many years into the future. What cost $100 today could cost $125 or more fifteen years from now. Be sure to account for inflation – which traditionally runs 1% to 3% per year.
The future cash flow worksheet
The Future CF Worksheet is a scratchpad you can use to itemize costs, revenue and cost savings. None of the information entered here will affect the rest of the workbook.
Use the Comments field to enter your own notes about the expected future cash flows. This is useful because you can refer back to this information if you ever have a “what was I thinking…” moment.
Once you feel you have a sound (conservative) forecast of the cash outflows, enter these amounts in the Additional costs column. Keep in mind that these values need to be entered as a negative number. Don’t worry about messing that up, though. The workbook has data validation rules that will prevent you from entering a positive number in this column.
The capital budgeting workbook is set up to only accept Additional costs for as many years as you said the asset would have a useful life. So, if you entered “15” as the Useful life of new asset(s) in years, you can enter 16 years worth of expenses, but Year 16 won’t be included in any of the calculations.
Cash outflows – church parking lot
More parking lot means more parking lot maintenance. For starters, I assumed that there would be additional costs for snow removal every year. This was estimated to be $450 in Year 01 and increase by 2% every year thereafter.
If this were a real church performing this capital budgeting, I would caution them to not enter their entire expected snow removal expense here. The costs tied to the existing parking doesn’t matter in this analysis. They’re going to pay that anyway. Only expenses (and revenues and savings) tied to this project should be considered.
Parking lots also need to be restriped to keep them looking good and resealed to keep them from deteriorating.
Restriping was estimated to take place every three years starting in Year 03. This cost was also expected to grow at 2% annually, or 6.1% every three years.
Resealing was expected to take place every three years starting in Year 04. The cost was expected to be $2,850 at that time and then, you guessed it… increase at a 2% annual rate.
Okay, we got the negative cash flows (the costs) out of the way, let’s move on to the cash inflows.
00:00 hello again small business professionals 00:03 small business owners and church 00:06 management professionals that’s what I 00:08 meant to say hey now I’ve got another 00:11 video I hear about strategic planning 00:14 for churches this will be the last one 00:19 of the soft skills as I put it other 00:24 ones in the soft skills category of 00:27 being mission statement and SWOT 00:28 analysis check out my channel to see 00:31 those let me also point out real quick 00:34 that there will be a link to my post on 00:37 the subject in the description and I 00:40 also like to put shortcuts you know in 00:43 the description because I can tend to go 00:46 on for a while and you know if you want 00:51 to jump to a specific part and then 00:53 gives you the ability to do that so hey 00:57 now let’s get into it so this video is 01:04 on strategy formulation in specifically 01:11 in strategic planning in general I kind 01:14 of molded them together because the way 01:17 I look at is strategy formulation is 01:18 like a piece of strategic planning 01:22 strategic planning to me includes the 01:26 videos I’ve made previously on like 01:30 mission statement and SWOT analysis but 01:34 in addition to that also capital 01:36 budgeting operational budgeting and 01:39 financial budgeting I’d also include in 01:43 their capacity planning but you know I 01:48 don’t have any content on that so the 01:54 time being that you’re on your own and 01:55 there you’ll I’m sure there’s somebody 01:58 somewhere that did address this capacity 02:00 planning for churches so we’ll start out 02:05 talking a little bit here about 02:06 strategic planning and then getting it 02:10 more into that actually 02:11 actual strategy formulation part of 02:14 things and a little later on so let’s 02:24 just start off here by thinking about 02:28 two different strategic plans 02:31 sorry I’m not enunciated agreat tonight 02:36 let me back up for a second and 02:40 apologize again and I know that’s not 02:43 you know really selling it when you 02:45 apologize for you on video but you know 02:49 for these soft skill videos mission 02:51 statements SWOT analysis strategy 02:53 formulation I don’t have a ton of like 03:00 you know visual material to accompany it 03:04 I could do it may someday do a 03:07 PowerPoint on those subjects but I don’t 03:12 know that that’s gonna really grab your 03:15 attention all that much more I mean 03:17 we’re all a little tired of powerpoints 03:19 aren’t we and you see my outlines up 03:21 there on the screen 03:22 so at least you kind of know what’s 03:25 coming up and if you see something bitch 03:27 thank you my board be more interested in 03:29 than the section that I’m talking about 03:31 a given time and go down in the 03:32 description click on shortcut jump 03:35 around you know as you see fit you know 03:37 there’s plenty of other people writing 03:42 on the subject of church strategic 03:44 planning and some very skilled and 03:48 experienced people so you know I I’ll 03:52 say you know this is not a definitive 03:57 look at church strategic planning or 04:00 strategy formulation it’s merely a 04:05 something to give you a couple ideas on 04:08 where to start 04:08 and how to go about addressing those 04:11 subjects so combine it with the other 04:13 great information that you get take the 04:15 best part of it take the best part of 04:17 something else combine it you know you 04:19 should be alright some 04:21 I am let me get back to my outline here 04:24 let’s consider two different strategic 04:26 plans okay so let’s say two churches 04:34 next door to each other okay 04:37 two different strategic plans first one 04:41 says they’re gonna put a handrail on the 04:44 steps for the elderly members of the 04:48 congregation that’s it 04:50 it’s our only plan for the upcoming year 04:52 there’s no budget 04:53 there’s no it doesn’t tie into any sort 04:57 of mission statement no SWOT analysis 04:59 anything like that they’re just gonna 05:02 put up a handrail because they think 05:04 that’s what’s needed okay and they do 05:06 that all right because it’s simplistic 05:11 and easy enough and they have a couple 05:13 volunteers over one weekend to get that 05:15 hammering put up that’s look at the 05:17 other church next to it this you know 05:20 they make a big production out of it 05:24 that’s not necessarily bad you know it’s 05:26 it’s planning it’s thinking about the 05:28 future of your church but they bring in 05:30 the pastor the elders consultants 05:32 members of the congregation and spend 05:35 six weeks poring over every step of the 05:38 strategic plan from mission statement 05:41 through SWOT analysis through strategy 05:43 formulation capital budgeting 05:45 operational budgeting financial 05:48 budgeting okay so they they give 05:49 everything it’s due time or anything 05:52 they think things through thoroughly and 05:54 have an outstanding plan when all said 05:57 and done but once the six weeks is up 06:03 and the new year comes it’s never 06:07 referred to again okay so which of those 06:11 two is the superior strategic plan well 06:17 I would say it is the first one because 06:19 it’s the one that got acted upon okay 06:22 all the thought in the world doesn’t 06:25 mean anything without action and this is 06:29 coming from a guy who is a proponent 06:32 of you know bringing in people to to 06:38 give differing opinions on strategic 06:41 planning giving it time giving it its 06:44 thought excuse me you know particularly 06:50 I’m a proponent of doing the capital 06:53 budgeting doing the operational building 06:55 that’s all great should be done but 06:58 again it’s all useless if no actions 07:02 taken because of it it’s it’s a waste of 07:06 time you know it it’s old it’s only as 07:11 good as the the actions that it leads to 07:13 okay so keep that in mind in terms of 07:20 the strategic planning going forward 07:22 when you watch my other videos when you 07:24 look up information from anybody else in 07:27 terms of I mean on anything you know 07:31 when it comes to reading a book you know 07:33 I’m I I used to think well just reading 07:36 a lot is great and it is potentially but 07:40 ultimately reading and learning a lot is 07:43 only as useful as the amount of variable 07:46 to apply okay I mean how much have you 07:48 read how much have I read that is a 07:51 distant memory it’s gone it’s you know 07:53 it’s it might be somewhere in there deep 07:56 down inside of my brain but you know I I 07:59 didn’t I never applied it to anything 08:01 you know so that’s something I’m working 08:02 on personally now is when I read 08:04 something you know I try to do my 08:06 homework and make sure it’s worthwhile 08:08 and make sure that I apply it one way or 08:12 another you know that may or may not be 08:15 completely practical all the time but I 08:17 don’t apply it because I want to learn I 08:19 want to commit it to memory I want to 08:20 commit it to habit you know I want if I 08:24 find something that’s worthwhile to read 08:26 that’s good to read I want I want to 08:28 absorb it okay so I would say the same 08:32 is true about strategic planning you 08:35 know if you make the commitment to go 08:37 forth with it and I believe you should 08:39 as I said before then you know I mean 08:44 throw yourself into it 08:46 okay absorb it lip take action upon it 08:49 right learn your lessons get your 08:51 feedback make your mistakes all those 08:54 sorts of things all right so you know 08:58 like I said I’ve given you a couple of 09:00 videos already and I have posts on all 09:03 of these except the financial budget for 09:05 churches which is coming soon I promise 09:07 as soon as I finish up the latest 09:12 spreadsheet template on activity-based 09:14 costing and going back I’m going to 09:16 write that darn financial budgeting for 09:20 churches Post I’m gonna get a video out 09:23 on it and I’m gonna have something the 09:28 post in a video for every aspect of 09:31 church strategic planning coming soon I 09:34 promise I am so you you know I’ve got 09:40 videos and all this you know I’ve got my 09:42 steps you know I’ve got my opinions on 09:45 how to approach things and you know just 09:50 as a reminder I touched on earlier you 09:52 know that starts with creating a 09:54 reviewing your church’s mission 09:55 statement performing a swot which 09:57 strengths weaknesses opportunities and 09:59 threats analysis of your church 10:01 formulating a strategy in particular 10:05 laying out goals to be med in for the 10:12 coming year for the coming years for 10:16 your church looking at any large-scale 10:19 projects your church might take on with 10:21 the capital budget again there’s the 10:24 analyzing your organization’s capacity I 10:26 don’t have closer videos on that 10:28 particular one but it’s worth worth 10:32 considering because you know your 10:35 capacity is the peak amount of demand 10:38 that you can handle you can’t have more 10:39 members than you have capacity for you 10:42 know maybe in this day and age with 10:44 virtual this and that and that might not 10:47 be entirely true but that’s that’s kind 10:50 of the good rule of thumb anyways beyond 10:52 that we’ve got the operating budget 10:53 which is a forecast of income and 10:55 expenses and then a financial budget 10:57 kasa the timing of cash flows that’s to 11:00 me comprehensive steps in strategic 11:04 planning okay now does that mean follow 11:10 those steps no question you know that’s 11:15 the only way to go about it no not 11:18 necessarily but I would say those steps 11:20 will give you if you legitimately go 11:22 through them legitimately commit thought 11:24 to them will give you a super 11:29 comprehensive review of your church its 11:34 goals your environment the reality of 11:39 money coming in and money coming out and 11:43 a number of other things it’s just a an 11:46 intense self reflective sort of thing 11:51 that might be uncomfortable at times but 11:53 will ultimately lead to your benefit it 11:58 just you know it’s it’s hard to picture 12:03 a situation where going through that you 12:05 would come out worse off than you went 12:08 in you know we need also say these these 12:15 steps are originally generated conceived 12:20 of in the for-profit realm you know the 12:23 the regular business realm or would we 12:25 call it not necessarily the not for 12:26 profit but they translate over just fine 12:29 you know that was something that I I 12:33 wondered as I got into writing these 12:35 posts making these videos you know what 12:39 how different would it be to and part of 12:42 the reason I chose to address churches 12:44 as kind of the first industry as I was 12:46 getting my website off the ground as I 12:49 was curious about how the how it would 12:57 all translate to the not-for-profit 12:59 realm in it translates just fine you 13:01 know there are a couple other things to 13:03 consider in frankly more so when we get 13:05 into the budgeting aspect of things but 13:09 a couple of things to consider they are 13:11 a little different than for a for-profit 13:14 business but you know really it’s very 13:20 very similar okay 13:23 so covered yeah I got the other videos 13:28 there okay so I’ll qualify this video 13:41 since I did the same for my mission 13:45 statement video and my capacity planning 13:48 video capacity planning no I didn’t do 13:53 that 13:53 sorry brain got scrambled there SWOT 13:56 analysis video so I don’t know this is a 13:58 mission statement video and I do this to 14:01 be completely upfront to be authentic to 14:03 let you know that I’m not trying to I’m 14:06 not trying to sell you anything I’m not 14:08 trying to pretend to be something I’m 14:10 not 14:11 I’m you know like I said just a guy who 14:15 is better skilled in the hard skills as 14:22 I put on the spreadsheets the budgeting 14:25 the numbers the quantifiable stuff okay 14:27 admittedly that’s my thing but created 14:32 these videos on the softer skills to 14:34 round out the whole the whole street 14:40 church strategic planning series I 14:43 wanted to cover more or less all of 14:45 those steps not just the the hard skills 14:47 because I thought it had something to 14:49 offer an effect and then on those issues 14:52 on those steps and I never pertained to 14:56 say no this is the way to do it 14:58 absolutely unequivocably you know I’m 15:02 right if you think different you’re 15:04 wrong I’ve never come off that way okay 15:08 these are after giving a lot of thought 15:11 the steps I would take to address these 15:18 qualifiable everyone to put in steps 15:21 mission statements swatter 15:23 says strategy formulation that you’re 15:26 doing right now so depending on I want 15:29 to get that out there I’m also not I 15:36 guess what I’m getting at with all this 15:38 and I might not have mentioned earlier 15:39 is I’m not a churchgoer per se I’ve been 15:42 to church I’m familiar with churches my 15:45 the remainder of my family goes to 15:47 church I’m been around people who are 15:50 regular churchgoers for many decades now 15:54 and I respect it now but you know I’m 15:58 not I’m not in the pews every Sunday so 16:01 if that bothers you and if you think 16:04 that I have absolutely no value to add 16:06 because of that then you know what to do 16:09 you might have done it already 16:11 you know check out another video or 16:15 whatever but you know I do think I have 16:18 something to offer I do think what I’m 16:20 saying is authentic and how I would 16:21 address it and I encourage you to hear 16:24 me out and take the ginn take the good 16:28 parts of what you hear I’m sure I have 16:30 something to offer so you know take the 16:33 take the best of what I have to offer 16:35 them and add it to the great stuff that 16:39 you’re already doing and you’ll be RI so 16:42 yeah that’s a little background about 16:47 where I stay in dead let me add to you 16:52 know for whatever it’s worth I’m not a I 16:56 have a pretty decent amount of education 16:59 but I’m not a big proponent of formal 17:04 education having been through it and 17:07 maybe just I don’t know I’ve learned 17:13 more on my own than I ever have from a 17:16 from a professor but I have you know an 17:20 MBA I am certified management accountant 17:24 okay and most people don’t know what 17:26 that is so if you’re wondering you think 17:28 I made that up but it may 17:29 but you don’t know what it is don’t 17:31 don’t beat yourself up about that most 17:33 people don’t but you know I can say this 17:39 about myself okay so if you are in 17:43 church management and you probably know 17:46 that a person can’t really understand 17:48 religious texts until they’ve read it 17:50 many times until they pondered them 17:51 thought about them debated about them 17:54 you know just reading it doesn’t do 17:56 anything and that’s that’s part of my 17:58 problem with a formal education you know 18:00 if you go and just sit through class 18:03 you’ll probably be alright most people 18:05 are gonna graduate just doing that some 18:07 people have to work harder than others 18:08 some people have to work less hard you 18:09 know we’re all a little different that 18:11 respect but if you just go and give it 18:13 the time you’re probably gonna be 18:15 alright that’s hell it’s not half the 18:17 battle it’s 80% of the battle just going 18:19 you know but to really learn something 18:22 like you probably have when it comes to 18:25 these religious texts you know to really 18:28 be able to speak knowledgeably about it 18:31 and to really you know just wrap your 18:35 head around it you have to immerse 18:37 yourself into it you have to you know 18:43 just dive deep get really down in there 18:47 and and challenge things and think about 18:51 them and decide how you feel about 18:52 certain things and maybe test things out 18:55 and all that and that’s what I’ve done 18:56 with a lot of this stuff particularly 19:01 the quantitative aspects the the hard 19:03 skills as I put them of strategic 19:06 planning I’m I’ve taken a time and 19:09 conceived of these hypothetical 19:12 companies and in situations and I’ve 19:15 tested and I have you know just ran my 19:21 head against the wall just several times 19:23 you know with the things I couldn’t 19:25 figure out I couldn’t make add up I 19:27 couldn’t make equal out together and you 19:31 know so I 19:34 I you know I give myself a hard time 19:38 about the soft skills but you know and I 19:40 think you know I do think I have some to 19:42 offer there but when it comes to the 19:43 hard skills I’m you know I know my stuff 19:48 I’m confident in that and I can help you 19:50 out in those so those hard skill videos 19:53 are coming like I said it’s operational 19:56 budget capital budget financial budget 19:59 okay so we take your intimate knowledge 20:02 of your church and add it with my 20:05 intimate knowledge of finances and the 20:09 quantitative side of things I’m sure 20:12 that I can help you in your church 20:16 address any problems that might fall 20:18 under that umbrella okay so you know 20:25 let’s get into the actual that’s a 20:29 little bit about strategic planning 20:32 let’s get into actual strategy 20:35 formulation okay so what is strategy 20:43 formulation how’s it how’s it different 20:46 from strategic planning and I’ll go back 20:49 to the analogy I made I know I made it 20:53 in a mission statement video I think I 20:54 made it in the SWOT analysis video and I 21:01 said the mission statement gives you 21:05 direction you know do you think about 21:09 north south east west north west south 21:11 west south east north west medicine team 21:15 twice but whatever you know a mission 21:18 statement helps point you in the right 21:19 direction you think about the 360 21:21 degrees there that make it an entire 21:23 circle helps you narrow down the 21:27 direction you want to go five degrees 45 21:30 degrees 180 degrees you know whatever 21:34 okay the SWOT analysis I would draw the 21:39 analogy then Maps the terrain for you 21:42 okay here’s the rivers 21:45 here’s the hills here’s the impassable 21:48 cliffs here’s an ocean 21:51 here’s freezing weather or the you know 21:56 the frozen tundra here’s the desert 21:58 those sort of things 21:59 that’s the terrain okay so then I would 22:03 say the strategy formulation is mapping 22:07 your route okay just like when you put 22:09 in your GPS and that blue line 22:13 highlights the roads you’re going to 22:14 take from where you are to where you 22:16 want to go that strategy formulation 22:18 each step of the strategic planning 22:28 makes clear the map okay and your your 22:34 direction you’re going and how you’re 22:35 gonna get there okay so you know what is 22:40 a requisite to planning a route dub well 22:50 you have to know where you’re going okay 22:52 I mean right now I live in Kansas and if 22:57 I just type in northwest Kansas into 23:00 Google Maps or Apple Maps or whatever it 23:04 may be I don’t know that I’m gonna get a 23:07 result because that’s it’s just not 23:11 specific enough okay I mean I can put in 23:13 a city and it’ll tell me you just take 23:15 me you know to the dead center of the 23:18 city but you know you think you have to 23:22 have you know a pretty clear idea of 23:25 where you want to go before you can plan 23:27 a route to get there okay so planning 23:31 the route in terms of strategic planning 23:34 is and strategy formulation is to 23:39 crystallize your vision of your church 23:42 okay this is the close your eyes let 23:46 your mind wander and what do you see 23:48 where is your church 23:52 you know what just what did look like 23:56 you know just what a what do you want to 23:59 see if it if if you had the opportunity 24:04 you know to wiggle your nose in your 24:10 church all of its problems would be 24:13 solved 24:14 it’d be operating exactly as you would 24:18 like what you know what would that look 24:21 like it’s your vision you know in five 24:23 years or so excuse me 24:30 so that’s destination and then we want 24:37 to talk about the landmarks that you’ll 24:40 pass on the way there those are the 24:42 goals that need to be met to get you 24:44 from where you are to your destination 24:48 okay you know I’m a big proponent of 24:52 keeping things simple or as simplistic 24:56 as possible complication has well 25:01 complication always tries to push itself 25:05 into anything we do okay where we’re 25:09 thinking creatures okay and we I mean I 25:16 know I do we think you just start to my 25:23 mind runs away with all these variables 25:25 things that go wrong and that and it 25:26 ends you know it’s great to plan and ifs 25:30 and buts and all that sort of thing but 25:32 you know especially if you’re just 25:34 starting out okay don’t want to get 25:38 overwhelmed don’t want to you know don’t 25:43 want to get burnout don’t want to say to 25:46 heck with it and you know and and first 25:49 of all not do any strategy formulation 25:50 but then if you do feel overwhelmed and 25:53 not take action on it talked about that 25:55 earlier 25:57 plans no good if you don’t take action 26:00 on it okay so there are within strategy 26:09 formulation three different strategies 26:12 that need to be considered three 26:15 different but complementary strategies 26:17 that you need to think about you might 26:19 be thinking you to sell three strategies 26:22 you know man one was gonna be enough of 26:25 a problem why do I have to make three of 26:28 them and that’s a perfectly logical 26:33 thing to think but stay with me or it’ll 26:37 kind of make sense here to understand 26:41 what these three strategies are and how 26:42 they all fit together so the first 26:45 energy is the one I’ve kind of talked 26:47 about so far that’s the overall strategy 26:48 Kay the this is known as the corporate 26:51 strategy in the business world it’s for 26:53 the entire company 26:54 okay the goals that your church as a 26:57 whole has to achieve to get from where 27:01 you are to where you want to be where 27:03 that vision is okay where that 27:05 destination is now a subset of that is 27:09 the competitive strategy okay and maybe 27:13 you think to yourself now well I’m a 27:16 church we don’t have competition I would 27:21 if that is what you’re thinking I would 27:24 urge you to rethink that okay because 27:26 from what I can see is an outsider 27:28 looking in there are two drastically 27:32 different views in terms of how a church 27:39 might address competition okay there’s 27:42 the the meta perspective I might call it 27:47 where a church things that as long as 27:51 somebody is a peace with God or 27:53 acknowledges Jesus as their Savior 27:58 or does any of those big picture things 28:03 then 28:07 it’s okay they might come here they 28:11 might go somewhere else but as long as 28:13 they’re they have these these big 28:15 picture tenants addressed as as long as 28:21 people you know are cool with these big 28:25 picture things then you know here 28:28 they’re what we’d love to have him here 28:29 but they go somewhere else that’s all 28:31 right you know they don’t necessarily 28:36 revolve around people just coming to 28:39 your church okay that’s the kind of meta 28:40 view the other perspective the other 28:43 extreme I should say would be the notion 28:47 that you and your church are basically 28:50 the one true way into paradise after you 28:57 die it’s the the one right way to live 29:02 you know in that case your competition 29:05 has every other Church that doesn’t 29:07 conform to exactly your your your same 29:11 doctrine okay 29:13 in either case both of you are gonna be 29:17 competing against anything else that 29:18 might keep persons from going to church 29:20 in the first place because the person 29:22 doesn’t go to church in the first place 29:23 they’re not going to come to your church 29:26 that believes that it’s you know the one 29:28 true the one true way okay so you my 29:35 point with this is you’re competing with 29:37 something whether you know it doesn’t 29:41 matter where you are you’re somewhere 29:43 probably between those two extremes your 29:45 church okay I would imagine most arm all 29:49 right but you know I’m not passing 29:54 judgment either way okay that’s you tell 30:00 you know I’m in absolutely no position 30:03 to tell you or your church how to what 30:06 to think in those respects okay like I 30:08 said I just use the extremes those 30:11 column as an example okay my goal is to 30:14 help you reach your goals whatever they 30:16 may be 30:17 and I make that illustration like you 30:20 said to help you understand that you 30:23 have competition okay so you have to 30:35 keep that keep that in mind as you move 30:38 forward and make your goals you you have 30:40 to have a competitive strategy to a 30:43 greater or lesser degree okay 30:45 the last of the three different 30:48 strategies is the functional strategy 30:50 okay 30:53 functional strategy is where you take 30:55 the overall strategy and break the goals 30:57 down into the departments in your church 31:00 okay so let’s look at our counterparts 31:03 in the for-profit world they will have a 31:09 corporate strategy but then have a 31:10 strategy for for manufacturing for 31:15 customer service 31:17 Stratton by strategy I mean goals okay 31:20 for marketing for sales for quality 31:24 control okay and all of those goals are 31:28 going you know achievement of those 31:32 departmental goals the functional goals 31:34 are gonna contribute to the achievement 31:36 of the goals by the organization as a 31:39 whole 31:40 so your church might be big small in 31:44 between but no matter how informal it 31:47 might be okay you have departments most 31:49 likely you have somebody that kind of 31:51 does your finance accounting you have 31:53 somebody kind of does operations so to 31:56 speak interaction with members so as we 32:02 move into the how-to portion of things 32:04 you can ultimately have to think about 32:07 what goals make sense for those those 32:09 smaller departments that are gonna help 32:11 your church as a whole reach its goals 32:14 okay so let’s get into the actual how-to 32:22 again this is just one way to address it 32:26 not the definitive way to dress it so we 32:30 talked about vision okay what is your 32:33 church look like in five to ten years 32:35 what do you picture what you know what 32:40 would make you feel like oh man we made 32:43 it you know its challenges are addressed 32:50 things are rolling good I mean you can 32:54 never Alton I don’t think then maybe 32:56 this apartment personality I’m a little 32:58 high-strung in that respect always 33:00 pushing to do more achieve more and that 33:04 but you know but putting in this is just 33:08 a thought exercise so you know what 33:10 would your church look like if you did 33:14 that if you you know if you took time 33:18 and thought about your vision and you 33:22 know what do you what do you seeing what 33:24 did what would it take to reach a goal 33:27 what has to happen 33:28 you can try working your way backwards 33:30 from that vision you can try to work in 33:32 your way forward from it and hopefully 33:34 as you kind of look at both you know 33:38 work your way backwards from the 33:39 destination work your way forward from 33:40 where you are hopefully you can start to 33:42 paint a picture of the goals that need 33:46 to be met in order to create that route 33:52 for you to get from where you are to 33:54 where you want to be you know I mean 33:55 think about it if you want a thousand 34:02 members in your church and currently 34:04 only have a hundred well you’ve got to 34:06 have 200 before you have 500 before you 34:11 have 800 before you have a thousand okay 34:14 things have to happen just in steps it’s 34:16 not tomorrow a thousand show up okay 34:19 that would probably frankly be 34:22 disastrous so it’s about thinking about 34:25 the milestones that have to be hit on 34:27 your way to achieving your vision 34:30 this should start to give you a little 34:32 idea of your path okay this is since 34:35 things are still a little big here but 34:37 it should start to hopefully you know 34:40 see a little little bit of that blue 34:42 line to lead you from where you are to 34:44 where you want to be you know in 34:49 particular the things you know what 34:52 happens tomorrow what happens next week 34:55 next month the theme the short term is 34:59 more under your control and it’s more 35:00 certain than the long term okay that’s 35:03 the case in whatever you’re doing 35:05 whether it’s strategy formulation or 35:07 forecasting you know when it comes to 35:12 making revenue or expense estimates for 35:20 capital budgeting operational budgets 35:22 know that okay so you know you want 35:28 probably more goals in the in the 35:32 short-term as in the coming year than 35:35 you do in year two three four five six 35:37 seven eight nine ten okay there’s you 35:43 know there’s any infinite number of 35:44 things that you could do to move 35:48 yourself towards that vision and you 35:51 don’t have the time and energy to do a 35:53 lot you don’t have the resources to do 35:54 them also so keep it simple and 35:57 achievable okay you know if you do your 36:02 little part keep in mind that the other 36:05 organizations out there that are doing 36:07 good in the world they’ll do their 36:08 little part and you know when you 36:10 combine all the little parts that you 36:14 know all the churches over the world do 36:16 then you know what what that can add up 36:21 to could be pretty significant okay so 36:25 with your goals I mean you probably 36:28 heard the old analogy about goals they 36:30 got to be smart I don’t even remember 36:32 them so you can we look that up here 36:39 it’s not not bad it’s not bad advice I’m 36:45 not cracking on it but smart means 36:48 specific measurable achievable relevant 36:53 and time-bound it’s good good rule of 36:55 thumb to to keep in mind when coming up 37:03 with goals okay you know you just I want 37:09 to I say this in every video and I want 37:12 to re-emphasize it you know just make 37:14 sure you’re dealing with reality don’t 37:17 don’t make pie-in-the-sky goals don’t 37:19 make goals I’ve worked for for-profit 37:22 companies they make goals they’re just 37:24 silly 37:25 I mean it’s just they’re they’re 37:26 arbitrary and they don’t you know they 37:29 don’t do anything to motivate anybody 37:30 they don’t you know it’s just going 37:33 through the motions it’s pointless it’s 37:34 a waste of time okay so so simple and 37:38 achievable okay focus on your strengths 37:42 from the from the SWOT analysis okay you 37:52 know if you have a car that’s meant for 37:59 met for speed then take those roads that 38:04 are long straight flat tops that you 38:06 know you can see the cops coming from 38:08 ten miles away right and you can take 38:11 that bad boy up to 150 I mean if that’s 38:14 your strength that’s your car if you 38:15 have the you know off-road vehicle or 38:21 that then take that that that can only 38:24 go you know 50 miles per hour tops don’t 38:27 worry about those take that take the 38:29 shorter route that can take the rough 38:31 terrain and and can handle it okay so 38:35 yeah keep in mind your strengths don’t 38:38 don’t fight yourself on your own goals 38:41 you know I’m saying so a couple of 38:44 things to keep in mind there 38:48 when coming up with goals based on your 38:53 vision another thing to do is put 38:54 yourself in the public shoes okay so 38:59 like it or not like said we talked about 39:04 so where’s the vision kind of addresses 39:08 the back up forcing it where the vision 39:10 kind of addresses the corporate strategy 39:13 all right putting yourself in customer 39:15 shoes is going to address the 39:17 competitive strategy the next section is 39:19 going to address the functional strategy 39:23 okay so when it comes to the competitive 39:26 strategy put yourself in the public’s 39:28 shoes okay you have to think about how 39:32 you’re perceived when you’re compared to 39:33 the alternatives alternatives might be 39:35 Church down the street or they might be 39:37 something frankly a little less 39:40 desirable okay a little less holy so to 39:44 speak but you know these temptations 39:47 exist if they didn’t everybody would 39:49 come to your church you’d have 7 billion 39:52 people there every Sunday I mean that’s 39:54 not the case there there are 39:56 alternatives now obviously there’s old 39:57 geography saying there it’s an extreme 40:01 example but you get my point 40:03 ok there are alternatives if people have 40:09 to make that decision 40:10 Sunday morning Saturday evening whatever 40:12 it might be Sunday afternoon to come to 40:19 find transportation and to come to your 40:21 church and make the commitment to stay 40:23 for 45 minutes an hour an hour and a 40:26 half two hours whatever it may be 40:27 okay so there’s competition so it just 40:30 helps to put yourself in your customers 40:32 shoes your member shoes your potential 40:35 members shoes and try to see things from 40:39 their perspective okay so you know that 40:46 the number of competitors depends kind 40:48 of where you are on that spectrum if you 40:50 take the the meta view as I said and you 40:53 know you’re really just competing 40:55 against temptations that would keep 40:56 people 40:58 from being religious or being spiritual 41:01 or something like that you know in the 41:03 end if your your your you feel as though 41:08 your church is the one way then you’re 41:09 gonna have a lot more competitors I mean 41:11 that’s just simple logic 41:12 you know you you’ve got a taller task on 41:16 your hands okay so think about what 41:23 makes your church different what it you 41:25 know again the for-profit parallel I 41:31 might draw as you know they always talk 41:34 about a unique selling proposition I 41:36 mean what’s your what what why you why 41:39 your church you know why why should 41:42 people to choose your church why do they 41:44 you know the the will probably come 41:47 from the do you know if you if something 41:51 doesn’t pop in your head right away you 41:52 know talk to your people solidify it 41:55 think about why you’re there you know 41:57 why you chose the work of this 41:58 particular church or volunteer or 42:00 whatever it might be you know you want 42:05 to you want to keep that in mind as you 42:06 make goals for a competitive strategy so 42:10 you know again does it also say there’s 42:15 a reason that these strategic planning 42:17 steps take place in the order that they 42:20 do because you want to think back to 42:22 your strengths and weaknesses from the 42:23 SWOT analysis which should my opinion be 42:26 done before this step okay about how you 42:29 set your church apart you know 42:31 weaknesses or things you want to avoid 42:33 strengths or things you want to 42:34 capitalize upon you know think back to 42:37 when you cross-reference strengths 42:38 weaknesses opportunities and threats 42:39 okay those are good ideas about goals in 42:43 terms of competitive advantage and you 42:46 think back to that I mean it had 42:48 everything from what the SWOT analysis 42:54 was your environment so you know you 42:56 want to if having considered your 42:58 environment the reality you work and you 43:00 want to make goals based on that you 43:02 want to make goals that are gonna set 43:04 yourself your church apart from other 43:07 churches based on the environment 43:11 you operate it okay so things from you 43:14 know your traffic and your signage to 43:17 the demographics of where you operate 43:21 out of to the culture of where you 43:26 operate up and all those things all 43:27 things to consider as you make those 43:30 competitive strategy goals so you know 43:35 keep in mind competitive strategy is a 43:37 subset of your overall strategy so don’t 43:39 make a competitive strategy the 43:41 contradict your overall strategy okay it 43:44 it it should just be a more detailed set 43:49 of goals that feeds from your overall 43:55 strategy okay because you can’t serve 44:00 two masters so to speak have a 44:02 competitive strategy that with goals 44:05 that have you doing one thing and 44:06 overall strategy has you doing a quickly 44:08 different thing okay you’re the the path 44:11 there’s gonna break off in okay or it’s 44:14 going to turn into a dead-end okay you 44:16 gonna have a fork in the road and 44:18 they’re both gonna be dead ends you get 44:20 to go back to the map analogy so the 44:24 final part here addresses and last part 44:31 the functional strategy so you got your 44:35 overall strategy you got your 44:36 competitive strategy you’ve got goals 44:38 for each okay it’s time to start then 44:43 thinking about what the departments 44:47 within your church what they can do what 44:50 they can achieve what they need to 44:52 achieve for those competitive goals and 44:55 those overall goals to be achieved you 44:58 know if your church is super small those 45:03 you know the the different functional 45:05 roles might be fulfilled by the same 45:07 people okay it that doesn’t matter you 45:12 know it again it’s more about the role 45:15 the number of individuals doing it okay 45:19 so that’s kind of a thing where you need 45:24 to 45:25 custom make it for for your church and 45:30 you know just again you might have 45:34 departmental goals if you’re not big 45:35 enough to have departments then it might 45:37 just being a goal for Sally who helps 45:41 out with the books a goal for Joe who’s 45:44 the pastor a goal for you know Bob who 45:50 does the outreach in a community or you 45:53 know whatever it may be just you know 45:57 it’s kind of breaking those goals down 45:59 and then the smaller more more tangible 46:05 chunks that just things that the 46:09 individual people okay because any any 46:13 organization any church is made of 46:15 individual people goals that those 46:18 individual people can say okay if I do X 46:21 Y & Z every week every day I can picture 46:25 achieving this that or the other in a 46:30 month in six months and then if I keep 46:32 doing it beyond their achieving this in 46:35 you know a year and then by achieving 46:38 that in a year that’s helped to improve 46:41 the church’s competitive position you 46:45 know whether it’s filling out or 46:49 somebody running your social media and 46:51 just doing doing something on there and 46:53 it all of a sudden helps set your church 46:54 apart that helps you achieve your goals 46:58 from your competitive strategy and you 47:02 know that coupled with other goals 47:04 achieved from your competitive strategy 47:06 can help you achieve an overall goal you 47:10 know an increase in membership a 47:13 stronger membership whatever it may be 47:16 I hope I’m painting that picture about 47:18 how you know you know it just all breaks 47:21 down to individuals day in day out it’s 47:24 a grind sometimes these sorts of things 47:26 but you know doing the right things 47:31 moving towards a goal achieving small 47:34 goals that compound in the big 47:36 goals and snowball to even bigger goals 47:38 which take you from where you are okay 47:41 to your destination your vision so kind 47:48 of wraps things up I want to emphasize 47:49 again you know try to keep this stuff 47:51 simple especially if this is your first 47:52 year doing this sort of thing you know 47:54 it you might be gung-ho about it if you 47:57 know if hear me talk about these sorts 48:00 of things get you gung ho then I’m 48:01 flattered okay but rein it in a little 48:04 bit keep a practical focus on you know 48:11 understand the first time around you do 48:13 this that you know it’s not gonna be 48:16 perfect you’re getting get better every 48:18 year that’s good okay you want to get 48:19 better at it every year all right so 48:21 don’t just keep it I just you know 48:25 that’s my advice to keep things simple 48:29 okay and understand that it’s through 48:31 failure really that we learn our lessons 48:34 okay 48:35 learn two things that we need to to 48:37 succeed so don’t you know don’t look at 48:40 that failure is the end of the road okay 48:43 just uh just a detour okay roads 48:47 washed-out there’s construction traffic 48:51 jam okay on the way so you know keep you 48:58 know just don’t let falling short you 49:01 know keep you from making big plans high 49:04 aspirations and that sort of thing if 49:06 you need to go through the steps again 49:09 these strategic planning steps I think 49:12 you’re gonna be better off and you’re 49:14 gonna be closer to those you know 49:17 everything that you do that I’ve 49:20 outlined I think will help you get 49:24 closer to achieving what you want to 49:26 achieve again if I were starting my own 49:29 church tomorrow these are the things 49:32 that I would do okay so that kind of 49:38 wraps up the main part of the video you 49:43 know I like to end my videos 49:46 with with a few questions 49:51 food for thought so to speak for the 49:52 comments before I do that I have to do 49:59 something that I’d love to do suck up my 50:01 pride and just ask for likes 50:07 subscriptions notifications comments are 50:11 good I guess anything that sends 50:12 positive feedback to YouTube that you 50:16 liked what you heard even if you’d only 50:18 like some of it it’s it’s free you know 50:21 you’re you don’t only have like so many 50:24 likes to give over your lifetime you 50:25 could like every video on youtube if you 50:27 wanted to you know like I said I hate I 50:32 hate to grovel but you know if you did 50:35 like something that you heard it’s it 50:38 does help it gives me positive feedback 50:42 to do more of this sort of thing and it 50:46 gives positive feedback to YouTube 50:51 Google whoever it may be that you know 50:54 hey get this in front of more people 50:56 that’s just the way the system works and 50:59 you know it’s not necessarily always the 51:02 best videos that get in front of the 51:05 most people okay you know thanks first 51:08 of all for even just watching the video 51:10 um you know this this YouTube video or 51:13 YouTube channels and it’s empathy and 51:15 and you know I’m thankful to have people 51:19 who watch it but yeah so any of that 51:22 stuff like subscribe you know because I 51:26 do have a lot more coming up you know 51:28 not just in church is just a lot of 51:32 great information coming up just for 51:35 business in general Alerts comments all 51:40 that so thank you in advance for all 51:42 yeah so yeah in the comments look what I 51:46 want to hear back from you guys is kind 51:48 of two things you know first of all 51:50 what’s your vision for your church okay 51:52 if you’re in church management great 51:54 what let me know what your vision is 51:58 for the church that you manage on the 52:02 flip side though – if you’re just a 52:04 member of a church what’s your vision 52:06 for the church that you’re a member of 52:08 okay I mean or what’s your vision of a 52:10 church in general how would you paint 52:12 your perfect church okay what you know 52:16 what would it do who would it serve a 52:19 bit would it be you know whatever 52:21 whatever comes to mind 52:23 whatever happens when clear your mind a 52:26 little bit close your eyes and think 52:27 about it and then on top of that another 52:30 thing I’d like to know from you guys is 52:33 whether it’s you know a church you 52:37 manage your church that you attend what 52:40 what’s one goal that would bring it 52:42 closer to that you know I think I don’t 52:49 have to list you have to go through a 52:50 whole strategy formulation process but 52:52 you know look giving this feedback could 52:56 give great ideas the people who are 52:59 watching this video five years from now 53:01 you know like my hope is this content a 53:04 little bit evergreen so it’ll be up for 53:08 a while and people you know that’s 53:10 beauty YouTube people keep searching for 53:13 it and if I get you know if we convince 53:16 YouTube that it’s good content they’ll 53:19 keep showing it to people and what you 53:22 put down in the comments now could help 53:23 inspire somebody one three five ten 53:27 years from the hundred years for me who 53:29 nothing was really so I’d love to hear 53:31 from you guys on that that’s all I got I 53:34 I didn’t even keep track of this time 53:36 keep track of time this time I just I’m 53:39 sure that this was long and appreciate 53:42 you if you’re still with me appreciate 53:44 you sticking with me this long and thank 53:48 you for that take care all right
Strategic planning consists of several steps, one of which is strategy formulation – the creation of goals to help you realize your vision
Church strategy formulation actually consists of three “sub-strategies.” The overall strategy, the competitive strategy, and the functional strategy
Failure to achieve your strategic goals is only bad if you don’t admit your shortcomings or if you quit
A step-by-step church strategic planning template
Every organization makes decisions – that’s why planning is necessary.
Strategic planning can mean many things to many people. There is no one way to create a strategic plan. Even if there was, the value isn’t in the act of strategic planning itself. It’s in the execution of the strategic plan. So, ultimately, the best strategic plan is the one you follow through on.
Keep that in mind as your church goes through this process.
Let’s look at two different church strategic plans
The first consists of one goal – “put a handrail on the steps for the elderly members.” In the subsequent weeks, the job was bid out and a handrail was installed.
The second involved the pastor, the elders, a consultant, and several members of the congregation. Six intensive weeks were spent on all the necessary steps. Documents were drafted, spreadsheets were made and hours of debate took place. When all was said and done – a very thorough and well-thought-out strategic plan was drafted. Then, nothing contained therewithin was acted upon. Nobody gave the strategic plan a second thought once it was done.
Which is better?
Obviously, the first church’s strategic plan is superior. Why? Because it got something accomplished. All the words in the world are useless unless they lead to action.
Should you follow this church strategic planning template exactly?
Don’t look at this template as a blueprint that you should never deviate from. Rather, know that following these steps should ensure, at the very least, that you think about your church in a comprehensive manner. Also, maybe most importantly, it will ensure that you give careful consideration to the financial aspects of your church operations. Whether you are a for-profit business or a not-for-profit church, your strategic plan has to make financial sense. If it doesn’t, then it’s pointless.
Here are the suggested steps for creating a comprehensive church strategic plan:
Create (or review) your church’s mission statement
Perform a SWOT (Strength, Weakness, Opportunity, Threat) analysis of your church
Formulate a strategy; i.e. what goals will need to be met?
Evaluate any large-scale projects with a capital budget
Analyze your organization’s capacity; i.e. your ability to meet demand
Create an operating budget – a forecast of income and expenses
Create a financial budget – a forecast of the timing of cash flows
Some of these steps might require very little time or effort. Others might take considerable work and necessitate the involvement of many individuals within your church.
Dedicate at least a little thought to all of these steps. You’ll probably uncover something that you hadn’t even thought of before. The biggest threat to your church is probably not the “known unknowns;” the things you know you should be more knowledgeable about. It’s the “unknown unknowns;” the risks you never even knew existed.
“Are all those steps covered in this church strategic planning template?”
No.
That’s a lot of material to cover. Too much for one web page (if you want to cover it thoroughly – which I do).
Most steps warrant their own page. As they’re created, they’ll be linked.
This post will cover strategic planning in general and strategy formulation in particular. What the heck’s the difference? That’ll be made clearer as you read on. Long story short, strategy formulation consists of the creation of goals and the fine-tuning of the direction of your church. It is a component of the broader concept of strategic planning.
Since this guide is for churches, I suppose I should kick it off with a confession
I’m not the most religious person in the world. Far from it, in fact. I can probably count on my fingers and toes the number of times I’ve been to church in my life.
Now, before you scoff, let me reassure you that I am no atheist either. I simply feel that spirituality is a private matter.
Not everybody feels that way, I know. A lot of people feel the opposite – that you can’t express your appreciation for God without doing so amongst your fellow humans. That’s perfectly fine; it’s just not where I’m at.
I wanted to be upfront so that you had a little background on the person writing this post.
“So…why’s a guy who rarely goes to church writing about church strategic planning templates?”
To be completely honest, it’s because “church strategic plan/strategy/etc” is an oft-searched-for term on Google.
Is that tacky? I don’t think so.
To be fair, that’s why 90% of the content on the web is written – because it’s what people want to know about. I have some knowledge on a subject and I’m sharing it within a niche where there is demand for that knowledge.
Beyond the demand for this information on Google, I’ve studied this subject extensively in the past. There’s a pretty good likelihood I’ve studied more on the matter than you. No, I’ve never started a church or led one through a miraculous turnaround.
Frankly, the “soft skills” (mission statement, SWOT, strategy formulation) aren’t my biggest strength. When it comes to the numbers (budgets) however, then you’re talking my language.
Fortunately, the soft skills involve a lot of material that can only be addressed by you and other members of your church. I couldn’t do that part for you even if I wanted to. I can sure as heck help you with the budgeting and anything else that involves numbers and a spreadsheet. At the end of the day, numbers are numbers and they have to make sense no matter what type of organization you’re dealing with.
Beyond that, I think I offer one more benefit that the professional church consultants of the world can not – I can offer you the perspective of a yet-to-be-won-over customer. If your strategy involves growing membership and reaching more people, then you need to understand how these people think. Not everybody has the exact same views I do, of course. But, if you’re wondering how the “spiritual, but not religious” crowd thinks, I can probably provide some insight.
“Do you have any qualifications?”
I’ve got a bachelor’s and master’s degree in business from AACSB accredited schools. Also, I am a Certified Management Accountant. But, all that really doesn’t mean much.
As you probably know – a person can’t really understand religious texts until they’ve read them many times. Until they’ve pondered them and debated them with their peers. Simply going through the motions and memorizing facts accomplishes very little. It takes deep-diving and immersion to get a real understanding of a subject.
That is exactly what I’ve done with the quantitative aspects (the “hard skills” so to speak) of strategic planning.
So…with your intimate knowledge of your church, your congregation, and your community, combined with my intimate knowledge of finances, we can probably get you pointed in the right direction.
Look, a lot of these concepts (especially the soft skills) come from academia. I’m going to write as authentically as I can, but some of these concepts are grounded more in theory than practice. Created by “those who can’t do.” Not by the people “in the trenches.” People like you
What is written here is not gospel (so to speak). This is not the only way to have a successful church. But, if your church follows these steps, I think you’ll uncover some valuable information. By going through these exercises, you’re bound to find a thing or two you had not considered before. If it serves no other purpose, this church strategic planning template will force you to think comprehensively about your church from a “higher level.”
That said, here we go…
Church strategy formulation
Remember that this post is kind of a hodge-podge. The section above covered strategic planning as a whole (all of the steps). This section will address the formation of a strategy – the third step.
Within this church strategic planning template, strategy formulation takes place after a mission statement has been drafted and a SWOT analysis has been performed.
What is strategy formulation?
The best way that I know of to explain this is to use a map analogy.
The previous steps focused on providing a direction (mission statement) and understanding the terrain (SWOT analysis). Strategy formulation is about deciding exactly where you want to go and what route you’re going to take to get there.
But, before a route can be planned, you have to know what your destination is.
Where do you want your church to be in five years? What’s your vision? What do you see when you let your mind wander? That’s your destination.
So, if you know your destination, that’s good. You have a leg up on a lot of other people. Let’s talk about the landmarks you’ll pass on the way there. These are your goals.
See how this is all fitting together?
As always, try to keep things as simple as you can. Too many goals and you run the risk of goals conflicting with one another. Or you might have a situation where you feel overwhelmed. Only make goals that will lead you to your vision. Not take you on detours.
As we all know, there is more than one way to get from point A to point B. In fact, you’ll be developing 3 separate, but important strategies (routes) for your church.
The 3 strategies
Maybe you’re rolling your eyes now. “Three strategies?!?! One was going to be enough of a pain!” I know, I know. Again, I urge you to read through this and give some thought to the topics covered. Also, don’t make things too complicated. If you and the other decision-makers in the church ever feel like you’re spinning your wheels – take a step back. Make sure you aren’t over complicating things.
By even giving just a little thought to these topics, you’re setting your church up for improvement.
So, what are these three strategies I speak of?
1. The “overall” strategy
This is what would be known as the corporate strategy in the business world. This will be comprised of the goals of the church as a whole and the strategies that need to be adopted to reach those goals.
Maybe you don’t consider church management to be a competitive industry. Personally, I don’t think it should be.
I suppose there are two extreme schools of thought on the matter.
There’s the “meta” school that says what’s important is that people make their peace with God and they live in a manner that is in harmony with all other living beings. In this case, your competition would be anything that might potentially disrupt this harmony. Your goals wouldn’t necessarily revolve around people following you, but rather that people followed someone, anyone, worthwhile.
The other end of the spectrum is the notion that you, and your church, are the gatekeepers of the “one true way.” In this case, your competition is any other church that doesn’t conform exactly to your doctrine. Plus anything that would lead people away from the church in the first place. Put another way – you are competing against the vast majority of the rest of the world.
Probably you and your church fall somewhere in between. You feel like your church and your beliefs offer the best chance for salvation. Following others might help someone…but you can’t offer any guarantees.
I’m not passing judgment either way. My goal is to help you reach your goals.
Here’s the reality of the situation, though. No matter how strict your beliefs, you are competing against something. Whether it’s another belief system or the most unforgivable sin imaginable, something is tugging at your current members and you’re would-be members. You’re competing with something and your church has to develop a strategy to compete. Or…you probably won’t reach your goals.
3. The functional strategy
This is where you take the overall strategy and break it down between the departments within your organization.
For example, a for-profit corporation would have to consider what operations, sales, finance, and marketing would need to accomplish as departments in order for the overall goals to be achieved.
No matter how informal they might be, your church likely has departments of its own. However small, your church has a finance/accounting department. It has an operations department – e.g. the actual interaction with the members. And so on…
What do these “departments” within your church need to accomplish so that your church can reach its overall goals? Again – try to keep it relatively simple. Keep this strategy oriented toward the bigger picture and the overall goals.
How to formulate a strategy
We’ll start first with the overall strategy and work our way down.
What does your church look like in 5 – 10 years?
That vision you have for your church in 5-10 years – what has to happen to reach that goal? Try working your way backward. Before you can say to yourself “we did it,” what took place?
You have to have 500 members in your church before you can have 1,000. You have to have 100 members before that. Think about the milestones that have to be hit on the way to achieving your vision. Hopefully, after giving this some thought, your path should start to take shape. Maybe you’ll see that this grand, overarching, vision you have for your church isn’t unattainable. It’s just a matter of steps. First one, then the next, and so on until you’re finally there.
Focus, in particular, on the coming year. Don’t get ahead of yourself. What milestones must be hit if you’re going to get where you want? These are milestones that, if they aren’t hit, then realizing your vision simply isn’t going to happen. Got it? Okay, those are your goals.
Again, don’t venture too far off the path here. There is an infinite number of things you and your congregation could do to benefit the world. There simply isn’t enough time and resources to do them all.
Fortunately, there are a lot of other do-gooders like yourself out there. Between you and them, you can make a considerable impact on the world.
What if the goals for the year seem too unattainable? Then you’re going to have to back up and rewrite them. Unattainable goals won’t motivate you, and they sure as hell won’t motivate those that work for you and volunteer for the church. We’re dealing with reality here and anything that is unrealistic serves no purpose. I can’t reiterate it enough. Particularly for the overall strategy – keep it simple. If you do that and focus on your strengths (don’t try to be everything to everyone) you’ll have a shot.
Put yourself in the public’s shoes
Next, you have to consider how you’re perceived when compared to alternatives.
The alternatives might be the church down the street or they might be something much more sinister. This is where you have to consider who your competition is.
If you take the “meta” view mentioned above, then it’s probably not the church down the street. It’s the temptations in this world that would lead people away from religion in general.
Conversely, if you take the view that your church’s way is the is one true way, then your number of competitors is considerably higher. It’s the church down the street and it’s the religious figures on the TV. It might even be any number of authors or bloggers. Again, if that’s the view you take, I’m not passing judgment – just trying to help you put things into perspective.
Most churches are going to fall somewhere in between these extremes, however. With your competitors in mind, whoever or whatever they may be, consider what makes your church different.
Think back to your strengths and weaknesses from the SWOT analysis. Your strengths are how you will set your church apart. Your weaknesses are, obviously, things you want to avoid when constructing a competitive strategy.
Did you cross-reference your strengths, weaknesses, opportunities, and threats when you did your SWOT analysis? That’s a great resource for ideas about goals that can help your church gain a competitive advantage.
Also, keep in mind that your competitive strategy is a subset of your overall strategy. Don’t get pulled off in a completely different direction. Think about what competitive goals for the coming year (and beyond) fit in with your overall strategy. As with the overall strategy – limit the number of competitive goals you create to a number that is manageable. Less is more.
Break your church’s strategy down even further
Every overall and competitive goal for your church as a whole is comprised of smaller goals that must be reached by the separate functional departments within your church.
If your church is small, many of these roles might be filled by the same person. No matter who does what within your church, you now want to consider what each functional department must accomplish in order for your overall strategy and your competitive strategy to work.
Not every church will have the same departments and if they are not big enough to warrant their own strategy, that’s fine.
You know the drill by now – make sure every goal set for a department is congruent with the mission, overall strategy, and the competitive strategy. Goals that play to a particular department’s strengths and takes advantage of opportunities are more likely to be achieved.
Finally, and most importantly, keep the number of goals as minimal as possible and keep things simple.
Complicated strategies are less likely to be carried out. Particularly if it’s your first time drafting a strategy.
Hopefully, this isn’t a make-or-break year for your church. Your strategy probably won’t be flawless, even if you are an experienced strategic planner.
I watched a really good YouTube video today about entrepreneurship. The gist of the video is that it’s only through failure that we learn what we need to in order to succeed. The only time we really fail is when we refuse to admit that we messed up and when we quit.
So, don’t let a fear of falling short of your goals prevent you from planning big things for your church. If you went through the previous steps (mission statement, SWOT analysis) you should have a better grasp on what goals can help your church reach its vision.
What does your church look like in 5-10 years? What’s your vision?
If you could make one goal for your church this year, to move you toward that vision – what would it be?
Leave a comment and let me know!
Also, check out my video on church strategy formulation below.
