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
They don’t, that’s not really how things work.
Instead, money is spent as it’s needed, they don’t allocate an exact amount at the beginning of the year or anything.
But they get the monthly spending statements, so if they notice an office is spending A LOT of money in the previous month, there would be a bit of an investigation as to WHY, and they could alter things if needed.
They also typically prevent drastically going over budget by requiring large purchases to get approved by higher ups at the company.
But like, I have a corporate credit card, and I do not have any instructions on how much I should spend on it, I am just given it to by things whenever necessary, and I just need to keep receipts for anything over $25. But one months I could spend thousands on it, and the next month spend nothing, all based on what’s needed for projects and the office.
That is the role of a financial controller and their respective finance team(s).
Their job is to monitor expenditure and keep managers informed as to how much of their budget they have spent and how much they have left.
They typically do this on a monthly basis: ‘month end’ is where they sum up all expenditure and earnings for the past month so they can report on the company’s performance that month, and to check if they are on target for their budgets for the year. It gives companies an opportunity to reign in spending if needed.
The financial controllers report to the Chief Financial Officer who, in addition to reporting the company’s finances to the board &shareholders, helps set company strategy based on its financial performance and expected performance.
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
A few very basic answers.
First, you’re going to break it down in to smaller time spans than a year in order to monitor it (usually by month or quarter). So in your situation where you have $500,000 you’d know you’re on pace to probably go over budget if after the first month you had already spent $75,000. On the flip side, you know that you should probably increase your spending if after the first month you’ve only spent $10,000.
Second, the company is going to have a rough breakdown heading in to the year on what they have spent in the past and what they anticipate to spend that year. So if last year you know you spent $485,000 and your business strategy is going to be roughly the same this year…you know a rough spending outline already.
Finally, and this is the reality of it, a lot of times it involves some scrambling over the last 2-3 months of the year. Already at $490,000 and it’s only November 26th? You probably ask your controlling office to go over your budget, and if they say no maybe you put a travel freeze in place for your office, push off buying supplies until Jan 1, and put a hold on the marketing campaign. On the flip side if it’s December 15th and you still have $100,000 left, you ask to roll that in to next year’s budget or find creative ways to spend that money. Bonuses, pre-spending on supplies or marketing spends that you will be using next year, Holiday gifts to key clients and suppliers, a new advertising campaign that you normally wouldn’t do but you need to spend the money…all sorts of things.
There is a team called FP&A or financial planning and analysis. This is literally their job. Some expenses are monitored daily while the others are monitored monthly / quarterly.
I must say that quite frequently they go over / under budget. Typically companies have extra cash to cover for this. They also have a proper approval mechanism for any over budget expense. This mechanism has to be followed before making the over budget expense.
Being under budget by 1-5% is good performance. Over budget is also acceptable if you can provide a business justification like unforeseen expenditure or new business initiative etc.
As others have already said, this is an FP&A team. Generally every c suite budget owner will have an embedded finance analyst that helps them understand their budgets and reforecast as the year goes on. Public companies tend to have more robust teams as the need for financial forecast accuracy is directly tied to earnings guidance.
Not a company but as a property manager my annual operating budget is a little over $16 million. I can be within 3% under that, but not a dime over.
I plan my budget 5 years at a time, and constantly re-adjust and re-forecast throughout the year.
Most spending is relatively easy to plan for like payroll and maintenance. Utilities are sometimes a crapshoot, as a really warm winter can leave us with hundreds of thousands in unspent cash.
Luckily I have the opportunity to re-forecast during the year, and either ask for more money or give money back that I know I won’t need. I only can do this until November however, and then must make do with what I have until March 31st.
Typically by January I’ll have a pretty good idea exactly where I’m going to end up by end of March, and it’s not uncommon to have a period of “frivolous” spending to burn the extra cash. So usually throughout the year we will keep lists of potential projects or big purchases that we don’t really NEED but would be nice to have, and so we always have a few big money pits we can use in a pinch.
I guess the short answer is a cycle of planning and re-forecasting combined with being prepared to spend like crazy.
Budgeting is very interesting actually.
The biggest problem with budgeting is that the people/departments/regions that revive the budged will always try to ask for as much as possible to make sure they complete their targets/plans.
The Soviet Union was a budget/plan economy and it failed eventually because of the problem I described above. If you are a factory director that is receiving government budget there is no point for you to try and be efficient. Maybe your plan is to make 100 cars in a month. Maybe you know you could do that with 50 workers. But if you fail for some reason you might get fired. So you ask for 70 workers and more money and then when you see that you can do more than 100 cars you slow down and do 101 eventually. This way the government doesn’t just raise the plan next month making your life harder.
In big corporations there are Auditors looking for this kind of inefficiencies. But still most budgets are spent because they are over planned in the first place. It’s then the job of the company to make sure their workers aren’t slacking and are doing the most they could with the investments.
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.
In my case they aim lower and then hit the mark with that Christmas party and some random last minute marketing
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