Submitted by angrybird7677 t3_zzswm0 in explainlikeimfive
stilsjx t1_j2ddq28 wrote
If I give you 100 dollars to repair the sink, and you only spend 50 of it, next time I need the sink fixed I’m going to give you 50 dollars. The other 50 goes to other expenses or into savings.
Companies use the same philosophy. Budgets which aren’t spent go straight to the bottom line of that years accounting, leading to more profits.
DirtyThunderer t1_j2dmtmy wrote
I don't think it's this half of the situation that people get confused by. What's confusing is that giant companies don't take a more sophisticated approach to things (or at least, many don't).
I work in quite a senior position at a big company and my boss sent an email several weeks back to me and other managers that was basically just 'we have lots of money left, send me your wishlists'. You would think that the company would realise what's happening when every year every department orders a bunch of fancy expensive tech in December, but it seems not...
hsvsunshyn t1_j2dz36d wrote
>giant companies don't take a more sophisticated approach to things
Giant companies are giant. It is difficult to give each group/department/division its own rules, so they prefer one-size-fits-all approaches, even if they are more inefficient individually. The amount of admiration overhead of having uniform rules means that it is more efficient for the entire company. In some cases, large divisions or unique groups are run more like individual companies: think of Gmail under Google, or the logistics arm of a retail chain.
>I work in quite a senior position at a big company and my boss sent an email several weeks back to me and other managers that was basically just 'we have lots of money left, send me your wishlists'. You would think that the company would realise what's happening when every year every department orders a bunch of fancy expensive tech in December, but it seems not...
Every year, people are limited to what they already decided they needed, and those decisions were often made the previous year. Then, once 95% of the year and 85% of the budget is gone, there is some discretional money left over that can be used for new lab equipment, better chairs, bigger monitors, or whatever else. This "extra money" is thought to be good for the morale, and it gives a chance to buy one-offs that were hard to budget for. My group often will buy equipment to do proof-of-concept or tester equipment, to evaluate if we should consider using new technology or not.
This "extra money", at least in cases I have seen, comes from the group spending less money than expected, often through intelligent employees, but sometimes just by dumb luck. In either case, it works as an incentive. If we figure out how to do the same job, but use 9 widgets instead of 10, then the money for that extra widget can be used to replace everyone's old nasty keyboards that year... The company does not care, since they expected to spend that money anyway, and we employees are happy when the pallet of new keyboards show up.
I do know there are some instances in the world where people request twice as much money as their group actually needs. My hope is that those are discovered and stopped, unless that group is making the company so much money that nobody cares...
FrankDrakman t1_j2e50k0 wrote
> Giant companies are giant. It is difficult to give each group/department/division its own rules, so they prefer one-size-fits-all approaches, even if they are more inefficient individually.
The myth of Procrustes was he welcomed all travellers to spend a night in his bed for free; however, if you were too short, you were stretched to fit it the bed, and if too tall, some of you got lopped off. We use the same Procrustean 'one-size-fits-all' approach in many places in the modern world, from grade school, to government policies, to goddam 'one-size' socks that are either too short or too loose. I suggest it's an artifact of the mechanical age, which we are in the process of leaving behind.
The assembly line that so tremendously increased material production was based on identical parts, assembled in an identical manner, to create identical products. Our new computer-controlled systems have the potential to create unique parts, uniquely assembled, to deliver a unique product to you. (No, we're not there yet) We may be leaving the Procrustean model behind.
I worked as a data analyst. I remember 'strategic planning' in 1980 - using 6 to 12 month old data to predict where you were going to be in five years, and what you should be doing to get there. Now we have real time data available, and the computing power to process it instantly. Presumably, the greater flexibility of this process will filter down to the budgeting system, but that will probably take the retirement of the Boomer generation, who are still stuck in the Procrustean paradigm.
stilsjx t1_j2dnmvg wrote
Hopefully you’re able to at least justify the wishlist.
“This fancy computer will run CAD more efficiently, saving time, and allowing the engineer to process more projects throughout the year.” - especially when the unit was due for replacement next year anyways.
angrybird7677 OP t1_j2dpunj wrote
This is what's infuriating and confusing to me. If a typical family spends their budget like how a company does, there would be much less $$$ saved annually, just because we need to spend every single cent annually. I just don't understand why a company don't see savings can be stored in the coffers for future rainy days.
Potato_Octopi t1_j2dr5b1 wrote
Storing money in a coffer isn't an inherent good. You should either be improving the company with that cash or returning it to shareholders.
If you let cash pile up the business with either issue a dividend, share buyback or make an acquisition, etc.
Generallybadadvice t1_j2dsy3g wrote
Or how about giving it to the employees who made it all possible...
FrankDrakman t1_j2e6l7y wrote
Incentive pay systems are a bitch to design, because people are so good at gaming them. One call centre I worked at had contests on Friday if weekly sales had been down. One woman, no matter how bad she was doing by lunch, always pulled out a bunch of sales in the afternoon, and was given the $50 cash prize.
I was the data analyst, and got suspicious. Sure enough, all most of those 'sales' would be cancelled on Tuesday or Wednesday of the next week. We listened to the tapes of her sales calls, and heard "I'll put the order in to reserve your spot; if you change your mind over the weekend, you can cancel." She didn't deny any of this when confronted with the evidence; she also didn't come back to work the next day, or ever after.
Also, the top performers on each team seemed to win week after week, which makes sense. They are the best sales people, so they generally sell more at all times. But an incentive that goes to the top performers most of the time only reinforces an "us vs them" mentality on the sales team, where the top performers are seen as getting the best leads (they do), and getting the most slack for things like being late, etc. (they did). As I said, designing a good, fair, working incentive system that can't be 'gamed' is not easy.
Potato_Octopi t1_j2dt9pq wrote
Sure, when a company has a good year bonuses are generally higher.
fede142857 t1_j2e91o3 wrote
If a company spends its entire profit paying its employees, the slightest dip in revenue forces it to work at a loss, if the situation persists for long enough it can obviously lead to bankruptcy
Not to mention potential issues like equipment/machinery/whatever breaking and not being able to afford getting it repaired or replaced because you gave the whole profit to your employees
moysauce3 t1_j2ejzr9 wrote
Some times it’s just not possible. Incentive comp hits EBITDA. There may be some bank covenants or loan requirements that need EBITDA to be certain amount or be above certain ratios or have certain amount of cash/AR on hand. There maybe a fee the company has to pay to the bank or lender for not being in compliance or even complete payback.
Fmatosqg t1_j2eu2sl wrote
Insert thrown out the window meme
wgwalkerii t1_j2eq4b9 wrote
Kind of off topic, but I have a set of good friends that does exactly this. They live very nearly paycheck to paycheck, and if a windfall comes their way it is immediately spent. An uncle died an left them around $20k and they immediately upgraded their vehicle.
For a while this struck me as absolute madness, but I found out they didn't like the situation either. They get food stamps and other assistance and if their savings goes above a certain (very low) point they no longer qualify.
So if they saved $500/month, which they could, in 4 months time they wouldn't qualify for aid any more and would eat through those savings in a very short time and have to reapply for aid. And the time it takes to jump through the necessary hoops means they miss a rent payment, or have to skip on groceries, or whatever other unfortunate choice.
The system is set up to keep people trapped in it, not to help people become more productive and escape it.
TheLuminary t1_j2e7f4j wrote
Businesses are not families, and I know lots of families that do spend their budgets like that. In fact my wife and I realized that we came in $5000 under our annual budget and are looking at things we could buy that would improve our life that we didn't think we could afford earlier.
Companies generally already have cash stores, but cash sitting is cash wasted. Cash can and should be invested, either back in the company, or elsewhere, used to pay down debt, or used to pay shareholders.
So if your budget is reduced because you didn't spend it. That money will not just sit for a rainy day, it will be transferred to another place where it can do work for the business.
A last example. Microsoft purchased Minecraft, because it had too much cash in the bank, and the interest return on that cash was less than they would get by buying Minecraft, so they did.
MildThinness t1_j2e6bby wrote
Different way of looking at it. Budgets are more like setting enterprise or department-wide financial targets.
If you want something more comparable between a company's spending and a family's budget (where they account for every dollar), look at the Statement of Cash Flow. Money comes in from operations (work), some comes in through financing (loans), some goes out the door when you buy new assets to make more money later on (car) then whatever is left over can get put into retained earnings (savings).
Hawk947 t1_j2ee0fr wrote
You would hate to hear about how the government does the same thing with our "tax dollars".
We regularly get calls from govt organizations that have budget for equipment. As an example, let's say they budgeted for $2000 for a laptop. I ask, what do you need to do with that laptop?
The answer is generally browse the web and check email, write documents.
I explain they can do that with a $750 laptop, so if they have $2000 budgeted, we can get 2 for them.
That's not acceptable, they need to spend that money on 1 laptop so when they show their inventory and assets report, there's no extra equipment.
So, they get a $2000 laptop.
It's maddening.
MySocialAnxiety- t1_j2ep2e3 wrote
Yep. can't tell you how many government offices/conference rooms I saw with 80" flat screens and "smart boards" right next to the cheap dry erase board that actually got used 98% of the time. And this was back in the early 2000s when all of this was new/expensive technology. Easily $2000-4000 tvs and I dont even want to guess what the smart boards cost
MySocialAnxiety- t1_j2eof4m wrote
> a more sophisticated approach to things
You could substitute "sophisticated" with complicated. The existing method is simple. Yes, extra more gets spent each December, but it gets spent on stuff the departments would possibly be asking for later anyway. With the existing method, its easy to track, gives departments a little morale boost cus they get some cool shit, and a greater sense of agency.
The alternative is a complex system trying to balance who came in under budget, by how much, how often. Which department got that cool thing they asked for? Did they need/deserve it? they came in under budget 3 times and they've gotten additional funding they requested twice, but one of those times the funding vastly exceeded the amount of money they were under budget. What is fair? Is one department seeing favoritism?
You can see how complicated that can become... plus there would likely be additional accounting and management costs required for implementing it, so the net benefit would be reduced.
MonteCristo85 t1_j2f3l6u wrote
If you have a good budgeting team they will. But generally we will let you keep it if we can manage to get the overall budget under whatever upper management expects the budget to be. No sense pissing everyone off if you dont have to.
TransSlutUK t1_j2f47ew wrote
If you start the year with an allocated budget, you are careful to make it last to cover emergencies and essentials. When you have limited time before the next budget arrives you can switch to the 'nice to haves to increase productivity/replace before they fail' it's basic common sense not rocket science. It is a tried and tested approach that works.
reachingFI t1_j2fli12 wrote
If it’s Capex then who cares. If it’s opex it’s better to be on the right side of the coin. Large organizations should require their leaderships to work in FP&A for a quarter. It would eliminate a lot of these types of questions.
PuzzleMeDo t1_j2dfaow wrote
Depending on why the sink needs repairing, it might cost $50 to repair, or it might cost $100 to repair. If you give me $100, and I repair the sink and return the $50 I didn't spend, and you punish me for this by saying from now on I can never have more than $50 for repairing the sink, you give me a strong incentive to waste money on future jobs instead of returning it.
stilsjx t1_j2dg0so wrote
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.
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.
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.
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).
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.
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.
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.
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.
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.
[deleted] t1_j2eehj0 wrote
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devil_d0c t1_j2eyw3o wrote
This isn't the part that confuses me. I don't understand why companies dont reward you for coming in under budget, and reevaluate assumptions when you go over budget.
stilsjx t1_j2f1k4w wrote
Oh that’s easy. They don’t do it because it would require the number crunchers up top to actually understand what is happening down below. Or care, for that matter.
The formula is to drive profits. That is all. A certain level manager might get a reward for coming in under budget, but their budget is going to get reconfigured.
The reasoning is different for different types of companies. But for a for profit company, every dollar spent requires a significant amount of effort to earn it. I worked in distribution for almost ten years, so this is my experience. Target gross margin on sales was 20 percent. So for every 100 dollars sold, 20 is profit. But that doesn’t take into account the cost to produce it. You’ve got to pay someone to source material, pay someone to take orders, pay someone to ship it, pay supervisors, warehouses, pay rent, cleaners, energy…etc. at the end of the year, we contributed like 2-3 cents on the dollar in NET profit. So for 1000000 in sales, 20-30,000 in net profit.
If you’re able to reduce 4 different departments budgets by 5000 each, you can double your net profit with the same sales. That’s a SIGNIFICANT motivation for the branches management to cut budgets. Because they DO get management incentives on that net contribution.
MidnightAdventurer t1_j2fcrat wrote
Think of it as punishing you for not understanding your own budget properly - You set the budget, or at least contributed to setting it. If you asked for money you didn't need then there's a good chance that someone else missed out on funding for something because you said you needed the money. If it turns out that you were wrong, especially if you are regularly wrong then they'll start to think you're padding your budget estimates and cut them back on the assumption that you'll make do with a bit less since you usually don't spend it anyway
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