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cleanscotch t1_j2e9kry wrote

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.

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HuntedWolf t1_j2ep6s1 wrote

What happens when they hit revenue goals without spending budget?

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KlutzyCarteBlanche t1_j2eqg0l wrote

Then you get a smaller budget next year and the extra budget you had this year is used to cover other teams who ran over budget

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WaterHaven t1_j2fntgg wrote

My worst job ever was mediating management meetings where they'd argue about why expenses were put under their department.

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PretzelsThirst t1_j2fqxud wrote

Then you are showing that you can hit the goal with a smaller budget, and will receive a smaller budget next year.

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Spcynugg45 t1_j2etygd wrote

As someone who works in this area, you're definitely right. It's more than just revenue goals though since every department isn't directly linked to revenue but they all have goals and expectations. People just have a tendency to spend everything that's given to them in a corporate setting, particularly if it advances one of their departmental goals, even if it isn't efficient or financially sound.

That's why it's important for companies to link funding to plans and have proper controls in place to make sure money is being spent in accordance with that plan, or changes are being properly reviewed and approved.

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primalmaximus t1_j2ez5j2 wrote

There's also the tax advantage that comes from spending their entire budget. Since corporate taxes, in the U.S. at least, are based on a business' net revenue as opposed to their gross.

The following is based on the assumption that corporate taxes are 30% of a company's net revenue.

Let's say a company has a gross yearly revenue of $1 million.

Their base operating costs were $600 thousand shortly before the end of the fiscal year. Because of smart employees they ended up operating severely underbudget without sacrificing quality and while maintaining the growth the higher ups wanted.

So the company would get taxed based on their $400 thousand in net revenue. That's $120 thousand.

However, the company didn't expect to be taxed on nearly half of their gross revenue. They don't have the funds on hand to pay that much in taxes. They only have around $80 thousand that they've set aside to pay their taxes with.

And so they tell the grouos to spend the rest of their budgets.

Then, when it comes time to submit their records to the IRS, because of the final spending spree, their net revenue is $200 thousand.

That means that with a 30% corporate taxe rate, they'd only have to pay $60 thousand.

That's half of what they should have paid, considering they met their corporate growth numbers while operating underbudget and $20 thousand less than what they budgeted for.

So that $20k goes into yearly bonuses.

Several companies, Netflix for example, utilized this system to their advantage. When Netflix was first starting out as a streaming service, they purposely went in the red while expanding their company. Doing so gave them several tax cuts that they could use in the future once they stopped recklessly expanding and started reporting net profits.

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phdoofus t1_j2fcl9x wrote

I always find this kind of stupid because it means you don't recognize that you're just making your best guess as to how things will go and nothing ever works out that way. It's kind of like going through the whole 'goal setting' process once a year but at least everyone recognizes that you goals will evolve as the the year progresses because of things that arose that you had no ability to predict or predict accurately.

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TheShadyGuy t1_j2fm1f8 wrote

The high level company goals are not going to change, though, especially at a publicly traded company. Regardless of the adversity through the year, the goal will still be to make money. A business trying to lose as little money as possible instead of trying to make money will have some big changes coming.

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Fmatosqg t1_j2etg8u wrote

I hope you can see how stupid this sound.

If you're in a situation where you know you can't reach target EVEN if all the budget is spent, the reasonable thing is NOT dump the extra money into anything so you can save face.

Big companies are a place where logic is not required, and not optional, it's actually undesirable.

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illachrymable t1_j2fi1rf wrote

You don't have enough info and are sounding like an idiot yourself.

Generally there will be an ROI target, so for every $1 invested, the company expects say $1.10. If you have been averaging a ROI of 9% during the year (so a $1.09 return for every $1 invested), you definitely still want to invest the extra money.

No business has a target of breakeven. There is a hurdle rate they are trying to hit that is a positive return.

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On top of this, because how fixed costs work, spending the last $100 in your budget will usually give you a better return than spending the first $100.

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newbrood t1_j2fck28 wrote

But what about getting closer to target? Would you prefer to be $100k short or $10k short?

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cartoonist498 t1_j2fomop wrote

You're thinking with the mindset of a company that needs to save $50 so that it can make rent at the end of the month, and wasting valuable time and effort scrambling to scrounge up money.

Large companies looking to increase revenue can't operate like that. If they're going to penny pinch then that oversight alone to micromanage the expenses of the company with thousands of employees would probably cost more than the money it saves.

And not only that, lower the productivity of the entire company as everyone puts in weekly effort to justify every cent, instead of doing their actual work.

Management commits money for the budget it invests into the company and as far as they're concerned, it's spent.

They don't care about penny pinching to get back $500k of their $500 million budget. They're more concerned on whether spending that $500k could have raised their revenue by another $100 million and the only way to know is to spend it. A healthy company drives forward to maximize revenue, not look backwards to save a few cents.

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