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stilsjx t1_j2dg0so wrote

Reply to comment by PuzzleMeDo in ELI5: Why do companies require annual budget be spent 100%? by angrybird7677

What you’re not taking into account is that you also helped with creating the budget, you need to justify the projected expenses. It’s not a punishment to reduce the budget. It’s in everyone’s best interest to run the company more efficiently and profitably. So rather than having frivolous spending at the end of the year, they reduce the budget.

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PuzzleMeDo t1_j2dib7i wrote

And yet, in real life people do try to spend their entire budget rather than risk getting it cut. For example, federal agencies spend an average of 4.9 times more in the last week of their fiscal year than in a typical week during the rest of the year. (Citation: https://www.nber.org/papers/w19481 )

Budget is power and status; there's no reward for returning unspent money to the company.

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stilsjx t1_j2dms8k wrote

Right.

I’m a volunteer fire fighter. Our captain is responsible for making a budget. It needs to be justified to the village. They base it on last years expenditures plus expected increased costs based on inflation. (Keeping it simple here because it’s ELI5, and I’m not directly involved in their budgetary planning).

They play it cautious throughout the year, in case there is something that comes up unexpectedly…if a hose blows out, or a truck breaks down…those expenses come first. But towards the end of the year, when we still have a surplus, they start buying things off the “nice to have” list, like upgraded nozzles to replace a functional but worn one. Or new PPE for the firefighters that is still within date, but a little rough. The nice thing about that, is replacing them would eventually be a need. This allows them to stay ahead of the curve year over year.

From an outsider, this may look like we spend more in the last month on frivolous things, when in fact they aren’t truly frivolous.

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amulshah7 t1_j2euq4l wrote

I get your point and the other points in this thread about the morale boost from getting new things earlier than expected, but I think it’s still wasteful overall. Upgrading every time earlier than you need means you spend more and waste more in the long run—e.g., replacing the PPE every 2 years instead of every 3 years (however long it’s good for) is more expensive and wastes good PPE. If they donated the old but functional equipment, it would be more excusable (but more work since they have to find somewhere appropriate to donate to).

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Ansuz07 t1_j2diivf wrote

> Budget is power and status; there's no reward for returning unspent money to the company.

This is not universal. Many companies have internal policies where managers are rewarded for unspent budget.

There is also an increasing practice of zero-base budgeting, where the entirety of the budget is revisited every year (or period of years) and all expenditures must be justified again, regardless of previous year's spending.

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Ratnix t1_j2dkx1r wrote

>Budget is power and status; there's no reward for returning unspent money to the company.

It's not just that. We do electroplating where i work. Stuff doesn't need to be replaced on a yearly basis. And when it does need replaced, it can be very costly, especially when one thing breaks and causes other things to break. And if that budget isn't allocated to that department, it can be a very bad time until the next budget comes out. So, spending money at the end of the fiscal year, in order to use up the entire budget, on stuff that just isn't needed, can be the difference between actually getting something replaced instead of slapping some duct tape on it and hoping it'll last until the next budget.

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Fmatosqg t1_j2ev9yc wrote

And that's because spending the money in short delay when the necessity arises is too complex and suspicious for the CFO to approve it.

Which is not that complicated when you're working in a small shop and the owner actually understands what the equipment is for.

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TheLuminary t1_j2e88ii wrote

Correlation vs causation.

You assume that the 4.9 time spike at the end of the year is due to managers frivolously wasting their budgets to pad it out. And I have no doubt that some do this.

But there is also an equally plausible and much more rational explanation that would also explain the spike in spending at the end of the year.
The department has some low priority spending goals that their employees identified during the year, maybe things like upgrading keyboards, or even starting a new project that would be beneficial but is just low priority. Management does not know exactly how the year will go, so they delay committing to these things as long as possible, so that they have some money in case of an emergency. But as the deadline of the fiscal year approaches, they can get more confident that they can spend this money on the lower priority things, and not expose themselves to a risk of IL-liquidity in their budget, because it will be refreshed soon.

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mtgguy999 t1_j2fiff7 wrote

But you don’t know if the sink will break that year or how it will break. So you’re incentivized to budget for it breaking in the most expensive way possible every year just in case it does break you can cover it. And when it doesn’t break you still gotta spend that money because you budgeted it. You might go 10 years with no breaks wasting $1,000. But in year 11 years be glad that you have that $100 to cover it when it actually breaks that year.

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