So most companies have a big corporate office and a bunch of regional offices that they allocate money to, I get that. Let’s say a given office gets a $500,000/yr operating budget (just throwing out a random number). How do they spend exactly $500,000? Because they obviously don’t want to go over budget but they don’t want to have a surplus and lose $ next year. So is there wiggle room? Would they spend $499,995 or something?
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First thing to say.. all budgets are always wrong all of the time (mostly anyway).
Consider your personal budget for a given time period. You do not have much data involved, you can prepare a personal budget for lets say a specific month thats accurate within a few pounds (writing from the UK).
But, what if fuel costs goes up mid-month.. or atleast some time after you prepared the budget? Your actual personal results for the month will now differ from the original budget set.
Now think of a large corporate.. many people, many departments.. LOTS of data. The budget will NOT be correct, this is understood. You can get high levels of accuracy but it will not be absolutely correct.
Budget Managers in large corporates are not neccessarily financial experts, generally the accounting department will have a liasion team (sometimes called business partners) who’s jobs are to work closely with budget managers to help them understand the variances between the budget originally set and the actual results. From there they will prepare a forecast, a forecast is almost like setting the budget again but taking into account more recent information. Think back to the fuel increase on your personal budget, what can you do? You can crack open your spreadsheet, do some calculations and work out what you think your new expense will be and amend your budget accordingly.
You now have a revised budget, you can compare it to the original budget to understand where the movements are.. but the key thing is that this new revision was prepared on the basis of more recent knowledge than the original.
Whats next? The cycle repeats. Maybe monthly, maybe quarterly.. maybe some other frequency dictated by your size/industry. This method of continuous forecasting is how large organisations ensure they do not take there eye off the mark.
So to answer your question more directly, the 500k in the original budget was prepared with a set of assumptions at a point in time if the assumptions were conservative then the budget manager may be tracking to under spend against budget.. with corporates approval they could then reallocate the funds to new projects, staff over time.. whatever.
If we are tracking towards an overspend, then what? Well we analyse the reason why, if it comes down to irresponsible spending.. wrists are slapped and close monitoring ensues. If its because some underlying assumption outside the budget managers control has changed.. perhaps we need to suck it up and allocate a little more to that department.
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