The Church of England's Diocese of Lichfield, which covers Staffordshire, the northern half of Shropshire and much of the Black Country, has recovered from a "serious threat to the financial viability of the diocese", following a "painful and bruising" five-year financial strategy.

In 2002 the Lichfield Diocesan Synod was warned of an ever-increasing gap between the contribution that parishes had been asked to make to diocesan expenditure and the amount they were actually paying; and that the diocese had been filling the gap by borrowing from the Church Commissioners and using up financial reserves.

Synod was told that the diocese was rapidly approaching the end of available cash reserves and that unless the cost base was reduced and liquidity made there would be a "serious threat to the financial viability of the diocese".

The strategy agreed by synod resulted in the diocese cutting £835,000 from its annual expenditure - including the loss of 50 stipendiary posts. The diocese also announced that its parishes had to repay their arrears.

The diocese is now entering the final half of the last year of the financial strategy and the Chair of the Diocesan Board of Finance, Peter Sharpe, is very up-beat about the future.

He said: "Diocesan finances are now at the stage where, although under some strain, income and expenditure are generally in balance. There are too many unknowns to be too specific about exact annual outcomes, but over a six year strategy and given prudent management, one year's deficit should be balanced by another year's surplus and vice versa. If we can now pick up the call to build a sustainable strategy underpinned by determining clear priorities, the pain of the past five years will have been worthwhile.

"Money is, of course, important, but I believe the growth of the church is determined not simply by the amount of money we raise, but how we use all the talents and resources we have been given in such abundance. Perhaps the dreaming of dreams has a big part to play in all this."

He added: "I would like give a simple but big thank you to the parishes for all they continue to do to keep the flame of the Church of England burning in this part of the world. The leadership of the diocese owes it to them to ensure we build on what they have helped us to achieve; so that money is used in the most effective way and we continue to celebrate strong progress in the years ahead."

Some 40 stipendiary posts have already been cut as part of the five year strategy; with another five to be made this year, three in 2008 and one in 2009; Parish Share arrears, which peaked in June 2003 at £2.75 million, have been brought down considerably - and 46 per cent of parish share is now paid by monthly standing order or direct debit which has improved the overall cash flow and liquidity.

But during the past five years the diocese has made these cuts while managing new significant financial commitments, including retaining the Clergy Defined Benefits pension scheme (albeit amended) while many organisations are ditching theirs, improving clergy stipends, and providing funds for evangelism and mission work in the parishes through the new Bishop's Growth Fund.

The diocese is determined to ensure it builds on its new financial foundations, as finance director Jonathan Hill explains: "During the five year financial strategy we agreed not to raise the total amount of Parish Share requested by more than 4 per cent. We are now preparing the budget for the first year outside the strategy and the Bishop's Council has agreed that we should seek to further limit the amount of increases. While we are still finalising next year's budget, we can announce that the total amount requested from parishes next year will increase by no more than 3.75 per cent.

"We can do this because over the past few years our income has been bigger and our expenditure smaller than we budgeted for. We can only sustain this if parishes continue to pay their Share by regular monthly amounts. Over the past five years we have paid back much of the money borrowed from our reserves and this is now doing what it should be doing - producing revenue. And we can use that revenue to limit the amount we have to request from our parishes."

In 2006 the Diocese of Lichfield made an overall surplus on day-to-day activities of £161,000, and made further gains through revaluations and disposals of assets of £2.9m - thereby improving the financial reserves by more than £3m.