When Oscar explains to Michael about the budget surplus using a lemonade stand analogy, he talks about the budget as a resource “available for spending”. I always looked at budget as being a target for your sales and contribution margin, which I understand are far more important… How real is it on an accounting basis?
For those who do not know which skit I’m talking about, https://youtu.be/dWfrMMNeK2k
Edit: The Office’s.
In: 2
I think you’re conflating an operational budget with a sales budget. The budget they refer to is how much it costs to operate the Office independent of sales. This is often a fixed number. If you don’t spend all the money you are assigned then your budget for the following year is reduced, as you’ve demonstrated you can operate for less than forecast. Government departments have this problem often and as such will go on wild spending sprees at the end of their fiscal years.
Accounting is there just to provide the numbers and ensure these numbers match reality. Then, it’s the business’s duty to figure out what to do with that information. I’ve seen managers being able to justify org expansions and increasing the budget based on a saving from this years budget. In ELi5 terms – look at how good I can run this organisation, if you give me more money I’ll be able to improve things even more.
In general a sales budget is called a “forecast” and not a budget. There’s no reason you can’t call it a budget, and I’m sure some organizations do but in general a guess at future sales is called a sales forecast.
In general in business you always have the problem of needing to know the future in order to make decisions for today.
So the sales department might set a forecast at X and treat it like a sales target. But that’s mostly because other parts of the company can do their jobs better if they have some idea of what is going to sell before you actually sell it.
How many delivery drivers you need to hire is entirely dependent on how much stuff you are going to sell. But buying a trick and training a driver takes time, so you need to hire and train them before you do the actual selling of the stuff. So being able to predict the future becomes very important.
Budgeting and forecasting is all about predicting the future so that you can make decisions in the present.
The other thing to keep in mind, often with a large “top down” organization like Dunder Mifflin is portrayed as. The corporate overloads would tell a manager how much money he can spend in a given year, and also tell him how much he should be selling in that year. These spending and revenue targets are set where they are to allow the company to be profitable while still maintaining service levels.
To ask you a question, what good is a sales target if the purchasing department didn’t actually buy enough inventory to satisfy that sales target?
Spending is kind of the same way, you often need to know how much money you have available to spend, before you actually commit to spending the money. So a spending budget is created.
So the purchasing department would base their inventory purchases on the Sale’s department’s sales forecast. If the sales department turns out to be wrong, the purchasing department will have order (or under) ordered and it’s going to be an issue.
But every single element of business spending is basically the same. You need to have enough employees to meet your demand for employees, but not to many because they you will have over paid. You need enough computers for the number of employees you have, not not to many. And on and on and on.
Much of the practice of “business” is all about budgeting, forecasting and record keeping. Often you have to make decisions about how much of something you need before you actually need the thing, and can’t change in mid stream.
The word budget can kind of mean two things.
1. It can just mean the money available for spending. “Our budget for HR salaries is $400k per year.” That means that’s money just made available for the given cause, HR salaries in this case. It’s not necessarily an estimate of what will be spent, it’s an allowance of what can be spent. Not sure if this technically meets the accounting definition, but is used this way frequently.
2. In corporate, sometimes budgeting will involve trying estimate dollars made and spent so you know how much money you need or what extra you’ll have. In this sense, it’s an exercise in forecasting. When a company says, “Our annual budget,” that’s usually what they’re referring to.
In this case, Oscar is referring to #1. Key words, “Actual, final costs of the year.” In other words, corporate allocated them so much money, they didn’t use all of it, and so if they don’t spend it it will be deducted from next year’s allocation. This is actually fairly common in many companies and government organizations.
Latest Answers