7 Biggest Mistakes in Church Accounting and How to Avoid Them

Money and churches have a complicated relationship. Church leaders, staff, and volunteers often have a limited understanding of financial systems, payroll, and even how to track donations. Church finances are often handled by volunteers, pastors, or even the pastor’s spouse, many of whom mix basic accounting skills with financial misconceptions that can damage your church’s reputation and even get you in legal hot water. Churches lucky enough to count professional accountants among their volunteers are, sadly, not all that common.

While hardly the most inspiring part of church operations, healthy financial skills and the use of church accounting software are crucial. With that in mind, here are seven of the most common — and potentially problematic — mistakes made while handling church finances. 

  1. Not having the money conversation

The attitude that it’s somehow distasteful to talk about money is common among many church leaders and their congregations. When you’re in the service of God, acknowledging the need for money can feel like you’re somehow cheapening that relationship. 

The fact is, however, that we live in a world where money is necessary. Churches need financial funds to accomplish many of their goals, whether they’re opening a food bank or replacing a chapel roof. Pastors need living expenses, and non-pastoral staff need to be paid. Accepting and talking about financial needs helps you improve how your church functions and how it supports its congregation and community. 

  1. Not tracking donations

Want to see a grown accountant cry? Tell her your church doesn’t have any way to track donations. A church is a nonprofit organization subject to state and federal nonprofit laws. 

Tracking donations helps you identify your most important donors and lets you issue donation receipts donors can use to offset income taxes. The best way to track donations is to use accounting software for churches, so you can issue receipts, run reports, and provide evidence of donation amounts and usage statistics should the authorities request them. 

  1. Not having adequate checks and balances

No one wants to think that a volunteer or staff member would steal church funds, but churches are vulnerable to fraud and graft. One in three churches experiences embezzlement, although the crime goes unreported in 27% of cases. Church members are often trusting and find it hard to believe that one of their own could take advantage of the church. 

Bear in mind as well that not all embezzlement is intentional. Accidental misuse of church funds is commonplace, usually because of a lack of financial skills. Establishing a transparent set of checks and balances reduces the risk of accidents, intentional fraud, embarrassment, and damage to the church’s reputation. 

  1. Not making a budget forecast

Churches usually have monthly budgets for payroll, maintenance, and charitable activities, but longer-term budget forecasting is less common. Making a long-term financial plan can sometimes feel uncomfortable, like treating the church as a business to some pastors, but if you want to meet your church’s long-term goals, a budget forecast is important. A financial plan shows your congregation how you allocate donations for important projects and helps you track your financial progress towards those goals, be they a community outreach program, scholarships for young church members, or reflooring the church. 

  1. Resisting automated giving

How are you accepting donations? Do you rely on physical methods like the traditional collection plate, or have you made the jump to virtual giving? Traditionalists may resist automated giving as impersonal, but virtual donations greatly expand your growth opportunities. Churchgoers appreciate the “fix it and forget it” framework of automated giving — they make the same monthly donation without worrying about forgetting to write checks or needing to carry cash to church. Automated giving is also more convenient for the church, reducing the amount of cash on hand and the need for physical bank deposits. When combined with church accounting software, automated giving makes tracking donations much easier. 

  1. Misuse of designated funds

Designated funds describe any donations or financial assets allocated for a specific purpose, such as purchasing groceries for a community outreach food bank. While an important part of any church’s fundraising toolbox, designated funds have some limitations.

Critically, designated funds can only be used for their intended purpose, making any excess funds unusable for other projects. This limitation is a problem nonprofits run into all the time. For instance, after a natural disaster, donations for those impacted by the event often flood relief organizations. If any funds remain after relief efforts end, designated funds are untouchable because the donor specifically requested their money go to that cause. In other words, excess funds specifically raised to aid the victims of an earthquake in Turkey cannot fund relief efforts to combat a cholera outbreak in Malawi. The donation’s designation locks in the fund for one specific purpose. 

This limitation alone requires churches to handle designated funds with care. Matters become more serious if church leaders, unsure of the nature of designated funds, either take from an established designated fund to pay non-related expenses or simply add designated funds to their general account. Such mistakes can lead to upset donors and violations of nonprofit accounting laws.

  1. Not taking advantage of church accounting software

No modern business would consider trying to manage its financial assets without accounting software. Small business accounting software helps you track non-pastoral payroll, process payroll tax deductions, pay bills, balance monthly budgets, and securely back up your records.

You can use business accounting software to track and manage donations, but doing so often requires a deeper understanding of the software’s capabilities than most of us have time for. Investing in accounting specifically designed for churches and other nonprofits is highly advisable. Church accounting software comes with a bit of a learning curve for the user, but once you master its basic principles, you’ll wonder how you ever did without it.