Viewing a single comment thread. View all comments

angrybird7677 OP t1_j2dpunj wrote

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

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.

6

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.

28

Generallybadadvice t1_j2dsy3g wrote

Or how about giving it to the employees who made it all possible...

5

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.

23

Potato_Octopi t1_j2dt9pq wrote

Sure, when a company has a good year bonuses are generally higher.

15

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

9

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.

2

Fmatosqg t1_j2eu2sl wrote

Insert thrown out the window meme

−1

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.

7

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.

6

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).

5

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.

5

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

3