Deficit Budgets – Never?

My working situation has of late been one where we have had to approve some deficit budgets –not once, not twice but now for a third year running.   This has created a great deal of angst internally and quite a bit of criticism from external voices for whom the very phenomenon of a deficit budget is an indicator of a major lack of both financial leadership and the appropriate due diligence of our board of governors. 

The standard language is used of course:  that effective organizations live within their means, that expenditures never surpass revenues and that a sequence of modest surplus budgets is a sign of a healthy organization but more, an indicator that good leadership is happening.   And some external agencies and donors will also add that they will not provide grant or financial support to any organization or agency that runs a deficit. 

In general, this is of course patently true and precisely the approach or disposition we should have towards a deficit budget.    A healthy organization achieves its mission with a financially sustainable model or approach to revenues and expenditures.   Effective organizations make tough decisions that keep a lid on expenses, sustain a lean administrative structure and, conversely, leverage more than one revenue stream so that these expenses are more than covered.

But does this mean that deficit budgets are never approved?   And does this mean that there is never a case for a deficit budget?   Consider two things.   First, the language of deficit budget assumes, of course, what we typically speak of as the annual or fiscal year.   If there is a deficit or a surplus, it is within the fiscal year – that is, within a time frame of 365 days, the revenue surpassed the expenses.   However, while this is a helpful template or point of reference, it is entirely an artificial construct.   It is arbitrary.   Why not 18 months to balance the budget?  Why 12 months?    In other words, it is an agreed upon reference point, and generally a helpful reference point, but it is an arbitrary one.   And the thing is that sometimes the growth and development of the organization may well not be well served by the constraints of rhythms of the fiscal years.  In many cases it is more helpful to think over the course of two, three or even five years. 

And second, a deficit budget can be strategic – in two ways.   A classic example might be deferred maintenance – that is, that you run a deficit budget to attend to something that requires immediate attention [such as the repair of the roof] because it would be much more expensive if it is delayed.   Sometimes you can capitalize an expense like this – that is, pay for it over the next five years.   But not always.   A classic example of failure on this was the decision of the BC government to eliminate the cost of clearing the under-forest in the BC forestry system – as a way to “balance the budget” but then four or five years later had a staggering expense to fight the fires that resulted. 

And then also, you might run a deficit budget because we can see the arc of the organization and you know that with this expense now, that will take you into the red, you can anticipate that in the years to come, the organization will be stronger because of it.   This is where you need to keep the following principle in mind:  your job is not to balance the budget but to deliver on the mission.  Ideally, you deliver on the mission with a balanced budget; but sometimes, you have no choice but to take the deficit hit so that the mission happens.  But only, of course, if you are on course towards sustainability.   A deficit cannot become a habit.   There has to be a plan – a reasonable plan – that you can see and work towards and have board support to reach a pattern of regular balanced budgets.

Institutional Intelligence is the capacity to work effectively within organizations.