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.
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I worked for the US government my entire career, and this always drove me batshit. My budget was a “mandatory spend”, whether useful or not. We’d buy promotional giveaways just to spend the money. Think about that…a federal agency buying can cozies because if we didn’t spend the money allocated to us, we’d get a smaller budget the following year. It just seems to encourage fraud, waste, and abuse.
Otherwise they risk getting a smaller budget next year. People will argue that they didn’t need the whole budget anyway.
Depends on the Company. In corporations that use Zero Based Budgeting what you spent last year or what remained in your budget is irrelevant. You have to completely rejustify your budget every year. It’s definitely way more work than just carrying over the previous budget but discourages the above notion where departments want to fully spend the previous budget In order to keep that same amount the following year.
It’s not required, but not using full budget is a great way to get budget reduced the next year and few managers want that…
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.
Unfortunately I think most of the answers here miss the most important aspect of why senior leadership does this.
When the fiscal year begins the company commits to the Board of Directors that they will be spending a certain amount (the budget) and that they expect a certain output from that spend (the revenue).
Not spending your full budget is a big deal especially when you dont meet your revenue goals, mostly because it looks like you didnt try.
When companies dont spend their whole budget AND they dont meet revenue targets that looks really bad. When they spend their whole budget but dont meet their revenue targets thats still not good but its generally regarded a simpler issue to fix (efficiency)
When we see companies who havent met their committed budget thats a big red flag and usually means we’re way hesitant to invest in them.
Edit: this is beginning to blow up a bit so I want to be very clear that I dont mean that companies should be spending unnecessarily JUST to meet budget but rather that if there’s budget left they should spend on something beneficial to the growth of the company. I.e. lets say you spent 80% of your budget and met your revenue goals and now youre wondering what to do with the other 20%, so therefore you spend that 20% on getting another sales rep, or getting more advanced technical training for your workers etc etc. As opposed to going out for a big team dinner just to spend the surplus. When leadership asks you to spend your whole budget, theyre expecting the former not the latter.
Nobody in leadership wants meaningless spend. That type of thing gets you fired in the blink of an eye in most organizations.
>why do such policy exist?
To justify funding; If they don’t use it all, then next budget isn’t going to assume they need it, which may not be the case.
This is also the case if the business is in any type of program that relies on their requirements. If they spend less, they might get less next FY
>Isn’t it better to carry over unused expenses to the next FY?
Not necessarily.
From an economical point of view, money sitting in a bank account is wasted potential. It should either be spent on making the company better, or paid to shareholders. Otherwise, it’s rapidly losing value due to inflation.
My employers spend their life explaining that THAT’S NOT HOW IT WORKS.
Idiot companies operate such policies because the middle-managers want to constantly keep upping their budgets to look important, so they have constantly growing budgets, that nearly overrun all the time, to make it look like they don’t have enough. Then some idiot above them just approves more money.
The same kind of middle management is also after money on their own pet projects, so when you come in £10k under-budget on one thing, they will want to spent that £10k elsewhere on something they care about. You’ve now “lost” that £10k permanently. Thus the only way to combat such idiotic financial management is to always use up the budget each time so they can’t justify cutting it.
In any company with an ounce of common sense or financial management, that’s not how it works. Many of my employers over the last few decades have had to actually announce regularly that that’s just not how it works, because people come in from elsewhere with the natural *impression* that that’s how it works everywhere. It’s not true. And, unchecked, it will repeat even in workplaces that don’t practice such idiocy because of people expecting it to work like that.
I manage several budgets in the 6-figure ranges, I basically go out of my way to make them as cheap as possible without compromising on anything. It’s usually easy to do so, because there’s a lot of nonsense wastage like this everywhere I go. I sometimes do “deals” too – look, I will cut out this £10k piece of equipment that was budgeted, replace it with a £2k thing that does everything we need but, and this is important, I want £5k of that saving to go on that thing you denied the other day because we didn’t have any money for it. Agreed?
More often than not the employer gets what they need, they get a saving AND I get the thing that my department’s been after for years. I just started at a new workplace and have already done this twice.
Because they actually LIKE people who can cut their budget and say “Well, yes, I’m sure that’s a lovely piece of kit… but we don’t actually need that level of equipment, we can do everything we need to do with a cheaper version without compromising on time or quality.”
When I was self-employed many years ago, I would promise my clients that I would save them AT LEAST as much money as it cost them to pay me… and I always did so. Because there is just so much unnecessary wastage because of nonsense like this.
Budget-holders have a responsibility to have a low cost, but also to fulfil all their needs – present and future – from that cost. You also have a responsibility to know what’s necessary and what’s not because you hold the budget and therefore you should know… because the people above you DO NOT KNOW.
Padding your budget is fraud, as far as I’m concerned, and customers and even your colleagues are paying for that. Every penny wasted is more money that doesn’t end up in your pay packet, eventually. Even if that’s just in the form of “Hey, Jeff, you saved us £50k this year! Have a £500 bonus!”.
Places that operate like this often don’t know that it’s happening, don’t want it to happen, or limited to only a layer of middle-management that do it for their own status-symbol gain (e.g. saving money to then spend on vanity projects and sucking up to the boss). It’s partly the upper-management’s fault for not keeping it in check, but also they can’t micromanage every budget and have to trust budget-holders.
But nowhere where there’s any actual sense of budgetary control is it actually “official policy”.
For government departments if you don’t spend your budget they will ask why you are asking for more money the following year. So it’s best to spend it all
It’s stupid. I always believed in zero-based budgeting. Yes, you can use the previous year’s budget as a guide, but rushing to spend money just leads to waste. I used to work for a large corporate software reseller and the amount of crap customers/governments would buy just before their fiscal year ended was insane.
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