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?
In: 485
Imagine you are asked: “next year, how much will you need to do what you do? Also, remember we all have to reduce our needs by 10%”
You look at everything you want to buy or spend. Maybe it’s a few gum balls. Maybe you pay someone to count gum balls. Maybe you need a new gum ball holder. You total it up and it comes to $100.
You ask for $100.
They give you $90.
For the rest of the year, you have $90 to manage your gum ball operation.
Can you go over? Maybe. If you ask for more and have a good reason. Maybe you sold a lot of your gum balls for more than you expected and raised more money. Maybe you got a government grant to study gum balls.
Sometimes the organization that owns the piggy bank might take away your money. Maybe the price of gum balls dropped unexpectedly. Or maybe the cost to buy them went up higher than expectedly.
The bottom line is that you had an estimate on how much it’d take to manage your gum ball department. You were given a little less. And now for the year you have to manage to that number. You can’t hire someone to sell gum balls for $10/ month because you only have $90 total for the year. You can go to your gum ball sales person and ask for a lower price for your gum balls.
Every month, someone gives you a report that shows how much of your $90 you’ve spent and how much you have left. They also tell you where they think things will be in a few months.
You, as the gum ball department manager have to make choices.
Every company (holder of piggy banks) keeps savings. If one department goes over, they use the savings. If one department makes more, some of that extra might go back into savings.
That’s how budgeting, generally, works. You can’t, really, spend what you don’t have.
Source: MHA / executive with experience managing $40M a year
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