In many companies, there’s this policy which requires awarded budget that must be spent completely once it’s approved. If the annual spend is below the allocated annual amount, there’s a chance next FY you won’t get the requested budget you asked for.
– why do such policy exist?
Isn’t it better to carry over unused expenses to the next FY? Saving expenses expenditure is a bad thing? Such a policy encourages employees to spend extravagantly the remainder amount nearer to FY-end.
In: 196
It’s to prevent misuse of funds and overspending. In a big organisation like a company not every single person working in that company is aware of how much money they have and how its being spent, there’s departments whose jobs it is to do that but the rest of the people working in the company don’t know, aside from some management positions who usually get an abridged run down of expenses. Smaller branches of bigger companies or organisations have their own accounting departments that are in charge of tracking expenses, making the budget and requesting money from the central accounting department.
So from the point of view of central management they prefer not giving out more money than is needed because that could lead to misuse, or at the very least unnecessary spending. From the point of view of smaller subdivisions though they prefer their budget not being reduced because in the off chance they have unexpected expenses their budget doesn’t cover, requesting money and getting it approved is a long drawn out process. Also it’s less work for them to receive lump sums and allocate them as they see fit than having to individually calculate and predict all expenses to a near zero margin of error, because that’s pretty much impossible but also a lot more work for them. So the general tactic is to track spending for some time and once they get an average of yearly spending to request a bit more than that which gives them more leeway with spending, and is less work for them. The year goes by and expenses are covered and catalogued, and when the year is nearing its end if they see they have left over money they simply find ways to spend the money which justifies them receiving it in the first place, so that to central management it will seem like they need that amount every year so they’ll get it next year too. If they find themselves short on cash it gives off the impression that either their accounting department/management is incompetent or that they’re overspending, even if that’s not the case.
TL;DR, it looks better when a smaller subdivision requests the same amount of money every year. If they request more than they initially got it seems like they’re incompetent or overspending. It’s less work for them and easier to operate with a budget that allows leeway instead of trying to fine tune it to be exact, which is impossible since there’s always unexpected expenses popping up throughout the year. Central management on the other hand does not want to overspend because that cuts into profits and of course they want to prevent embezzlement, so all money allocated has to be accounted for and spent on something with the receipts and invoices to prove it.
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