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What are the Pros and Cons of a Slush Fund?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 September 2016
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A slush fund is usually defined as some type of financial reserves that are maintained above and beyond the usual accounting line items, usually as some sort of general line item that can be used to track disbursements that don’t fit into the criteria for other funds. Businesses may have slush funds set aside to manage purchases that are outside the scope of the basic operating budget, while individuals and families may use slush funds for extra expenses that are above and beyond the usual household expenses. There are several benefits to maintaining a fund with secret money as well as some potential liabilities, including the possibility of failing to pay taxes on the funds and getting into a great deal of trouble with a tax agency.

When managed properly, there are several pros associated with operating a slush fund. The fund can function as a means of managing expenses that are hard to relate to specific budgetary line items. By keeping extra money in the slush fund, it is still possible to account for every purchase even if classifying that purchase is somewhat difficult. Using this approach, there is no potential for the money or the purchases to be considered off the books, and therefore very little opportunity for the transactions to not be accounted for when calculating taxes.

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Since the money kept in a slush fund is not required for day-to-day operation of the business or the household, the funds can often be used for purposes that are outside the scope of that budget. For example, a household may set up and maintain a slush fund for use when the family decides to take a last minute vacation or extended weekend holiday, or to make some sort of impulse purchase like a new wide-screen television. Since the money is the fund is not earmarked for any particular purpose, the household can determine when and how to use the funds. In like manner, a business may decide to use the slush fund to finance participation in a business conference at the last minute, even though the budget does not provide funds for that particular purpose.

There are a couple of potential dangers associated with the maintenance and use of a slush fund. The temptation to keep the extra money off the books is always present. Assuming that the funds moved into the fund are already accounted for as income and are included in calculating taxes due, there may be no problem with keeping the fund off the books. Unfortunately, hiding the money can increase the chances of failing to pay applicable taxes, a situation that ultimately leads to incurring fees and penalties when the money is discovered. Depending on the amount found in the slush fund, this could launch a full-scale investigation into all aspects of the financial accounting, as well as damage the reputation of the business.

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Terrificli
Post 2

@Soulfox -- overspending is a problem, but trapping too much cash in vehicles such as bonds can also be a problem. If, for example, virtually all excess revenue is sank into treasury bonds, that money is stuck for a few years unless the organization decides to withdraw it early and pay penalties.

A good solution, then, may be to look to long term investments for some money, short term investments for other cash and a slush fund that is earmarked for either emergency or extraordinary purposes. Implementing that strategy could keep organizations from overspending yet still have enough free capital to deal with shortfalls in revenue.

Soulfox
Post 1

One of the biggest problems with slush funds is the temptation to spend them when times are good. Say, for example, an organization is exceeding budgetary projections and puts excess capital in a slush fund. The organization -- and particularly the board -- may be tempted to spend that on unnecessary items rather than saving it. If that kind of spending gets out of hand, the slush fund can be reduced to almost nothing.

Having zero funds in reserve is a very bad thing should the economy dropped and organization finds itself with less incoming revenue than expected. The solution? Either keep a good grip on expenses or simply dump excess revenue into vehicles such as bonds that make it a bit difficult to get to the cash.

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