When you’re starting a church, you’re likely thinking about the sermons you’ll give, the faith-driven discussions you’ll have, and the community you’ll build. While those are all certainly perks of starting a congregation, you’ll also need to be realistic about the potential challenges you’ll face.
Starting a church is hard work and involves a lot of moving parts. Most notably, you’ll need to ensure your church is financially viable and follow proper nonprofit financial management practices to keep your mission up and running.
Some new churches fall into financial pitfalls that are difficult to recover from. We’ll explore some of these and how your church can avoid them.
1. Lack of a Formal Budget
Your budget is your church’s financial roadmap. Without one, your spending might not align with your mission, and you may end up overspending on areas that won’t set your church up for success.
How to Avoid This Pitfall
- Draft an operating budget before you launch. Hold planning sessions in which your church leaders meet to refine your mission and translate it into a 12-month budget. Prioritize expenses based on their importance to your mission so you know which costs you can cut if necessary.
- Make realistic projections. All organizations should use past financial data to project future revenue and expenses. However, as a new church, you don’t have this information yet. Instead, do some research on church giving trends and expenses, particularly for churches in your area, if possible. Reach out to other local church leaders to hear about their experiences.
- Include a contingency fund. As YPTC’s nonprofit budgeting guide explains, “A contingency fund is money you set aside to cover unexpected expenses or buffer against revenue fluctuations. Set aside a small percentage of your budget for this area and define what expenses this fund can cover.” For instance, you may access your contingency fund if donations fall below a certain threshold.
2. Overcommitting to a Facility Too Early
Whether you have a lease or mortgage, your church building itself will likely be one of your largest expenses. This high cost can be difficult to manage in the beginning, especially before you’ve really gotten started. Paying for a large space can cut into funds that you may otherwise spend on ministry, outreach, and staff.
How to Avoid This Pitfall
- Use a flexible space to start. Consider renting space in a school, theater, or community center in the beginning. That way, you won’t have to commit to your own space before you’re ready and can reserve funds for more mission-critical areas.
- Seek in-kind donations. You may think of in-kind contributions as simple canned goods or school supplies, but they can also be gifts of land, buildings, or the use of facilities or utilities. Reach out to community members to see if anyone has a space they’d be willing to let your church use.
- Upgrade when your finances stabilize. When your church has grown enough and consistently attracts a large crowd, that may be a sign you’re ready to get your own space. Try to negotiate your lease or mortgage to keep costs as low as possible.
3. Poor Recordkeeping
Inaccurate or incomplete records make it difficult to prepare for audits, maintain IRS compliance, and report your finances to stakeholders. Additionally, once you have clear financial records, it’ll be easier to develop a suitable budget in future years.
How to Avoid This Pitfall
- Use accounting software. The right system will take some of the stress out of financial recordkeeping by automating the process for you. You may consider a general accounting solution with nonprofit options like QuickBooks or a nonprofit-specific solution like Aplos.
- Keep expense documentation. Hold onto receipts and invoices so you have proof of all transactions. That way, you can keep your expenditures organized and ensure your financial statements are accurate.
- Reconcile accounts monthly. Compare your internal financial records against external statements to ensure accuracy. Doing so regularly allows you to catch any mistakes and rectify them before they spiral into larger issues.
4. Not Starting a Reserve Fund
Once your church is up and running, you should be able to fulfill your mission continuously over time. For instance, if an emergency strikes or you face a summer giving slump, you’ll need a buffer to ensure you can continue serving your community no matter what.
How to Avoid This Pitfall
- Start small. When your church is first starting out, you likely won’t have a ton of leftover funds to dedicate to reserves, and that’s okay. Contributing even a small amount each month and incorporating this step into your church’s financial routine will set you up for sustainability.
- Build your reserve over time. Most experts recommend that nonprofits reserve at least three to six months of operating expenses. While every organization may have a slightly different ideal amount depending on its size, mission, typical cash flow, and risk tolerance, your church should set a goal and work towards it.
- Create a reserve fund policy. Develop guidelines for who can access your reserve funds and when. For example, you may allow church leaders to access the reserve if your net assets fall below a certain amount. Your policy should also include monitoring and reporting procedures so you can ensure your fund grows and update your team about its growth over time.
5. Not Tracking Donor Restrictions
Funds with donor restrictions are contributions donors give for a specific purpose, program, or timeframe. When donors attach restrictions to their gifts (typically major or planned gifts), you have a responsibility to adhere to these stipulations. Otherwise, you could end up losing donors’ trust, harming your church’s reputation, and even facing legal action.
How to Avoid This Pitfall
- Track funds with and without donor restrictions in separate accounts. Create separate categories for restricted and unrestricted funds in your chart of accounts, with subcategories for permanently restricted, purpose-restricted, and time-restricted funds. Your accounting software can help streamline this process.
- Maintain transaction records. Track restricted fund use by keeping associated transaction records. This step will not only help you ensure you’re allocating funds properly but also stay accountable to donors.
- Communicate with donors. Update donors on the projects or programs they’ve contributed to. Thank them regularly for their support, and share impact metrics and stories that illustrate the difference they’ve made in your community.
Financial management can be overwhelming, especially for first-time church leaders. To avoid the stress and confusion, consider outsourcing your church’s financial management to a nonprofit accounting firm. Leaving your finances up to experts can disentangle them from internal interests and empower you to focus on what matters most: your ministry and congregation.
