Staying Responsible When Your Yearly Budget Needs To Go To Zero

There is always uncertainty when making a budget. We tell ourselves that we will stay within our limits, but unexpected costs always seem to pop up. That is why most responsible financial managers make budgets that are padded for uncertainty. However, what are the best ways to budget responsibly if your organization or department has a budget that doesn’t allow for a surplus and needs to go to zero every year? This can be the case for many reasons. Some organizations like government entities and nonprofits are not allowed to have a surplus. Some companies have arrangements such that departments that have surpluses will get budget cuts in future years. What are responsible ways to put a buffer in a budget when you need your budget to hit zero at the end of the year?

1) Initial budgets should have room for a surplus

This may seem counterintuitive when the goal is to get to zero, but creating buffer at the beginning of the year stops your organization or department from going under because of an emergency maintenance need or expenses from an unexpected lawsuit. Surprise expenses are a reality of life, and staying above water is vital.

2) Unallocated portion or rainy day fund

Your organization may allow you to pad the budget for unexpected things by having an unallocated portion of your initial budget. This can be allocated when needed. If your organization doesn’t allow for an unallocated portion, you can allocate extra funds to one area and let leadership know that a certain percentage of the funds allocated to that area are available to be reallocated when needed for unexpected expenses.

3) In the case of a surplus: see if you are allowed to pay long term vendors ahead of time. If not, upgrade equipment and stack supplies for next year

Your organization may or may not allow this depending on its rules it for budget outflows and how closely that is linked with its use of accrual or cash accounting. If you’re getting close to December 31st and risking a surplus, long term capital improvements are a great place to push cash out. Anything that requires building or giving money to a long term contractor will get rid of your surplus and put you in good financial shape for the coming year. If your organization doesn’t allow you to get rid of your surplus by paying vendors for future work, consider making short term expenses for things that will be applicable in the coming year. This could include upgrades of equipment, office supplies, or buying a fleet of vehicles for future use.

If all else fails, you can always get rid of your surplus by giving out bonuses!

Murtaza “Murti” Khan

Blog posts are intended to be short informal reflections, not all inclusive content. Every organization is in unique circumstances and there are exceptions to all best practices