[abduhl]

Top management doesn’t “owe” them any money when they need it later. Say you budget $100 for dinner tonight and you go out and it costs $75. Do you owe the restaurant $25? While certainly some people might roll the $25 into the next day’s meals, some people might allocate that $25 to another cost center like buying a new car.

Budgets are meant to estimate costs and manage cash flow. From a greedy team perspective it’s best (and self interested) to try to game the system as much as possible so you get the largest share of the pie. From the organizational perspective it’s best to reallocate capital efficiently, especially if a team consistently over budgets.

[nybble41]

> Say you budget $100 for dinner tonight and you go out and it costs $75. Do you owe the restaurant $25?

No, but if you accurately forecast that dinner will cost $100 on average, and this time it only happened to cost $75, you should put most of the savings aside for the other times when it will cost $125 and not reallocate it to be spent on something else.

Consistent over-budgeting is still an issue which would need to be addressed, of course, but a system where any annual cost underrun is treated as over-budgeting and punished by reallocating that part of the budget to other groups ignores the inevitable presence of risk in the budget forecast.

[abduhl]

We’re arguing about different things it appears. This thread started with someone saying that a team coming in under budget should is “owed” that money in the future by management. I said this isn’t so and that it’s a self centered and myopic viewpoint. You are talking about punishment and reallocation, presumably by reducing the budget the next cycle. I’m not in favor of that unless it’s clear that the team is consistently over budgeting.

For example, if a team says they need $100 a year and comes in at $90 then I don’t think next year’s budget should be $110 while some people in this thread think it should be. That makes no sense. Neither do I think the budget should be cut to $90. Unless something has changed, the budget should stay the same.

Your point about average cost just means that you’re budgeting on the wrong timeframe. If you estimate your average dinner is $100 but you’re spending $75 most of the time except for one huge dinner every month then you should be budgeting $75 for dinner and then budget separately for one large dinner a month. Similarly, if a team says they need $10MM a year but half of that is them trying to amortize a $25MM cost over 5 years then they are budgeting incorrectly. Their budget should be $5MM with a $25MM side fund contributed to on a risk adjusted basis.

The worst case scenario is the team budgeting $10MM when they only need $5MM and losing control of their budget so that when the real charge comes due they’re fucked because they’ve been spending $10MM for the past 5 years without realizing the fixed charge is coming or, worse, realizing the fixed charge is coming but just ignoring it so they can buy new office furniture and exhaust their budget this year selfishly.

[nybble41]

> For example, if a team says they need $100 a year and comes in at $90 then I don’t think next year’s budget should be $110 while some people in this thread think it should be.

IMHO it depends on why the expenses were less than the budget. If it's a matter of probability or essential uncertainty then the savings should be set aside for other occasions where luck isn't as favorable. If the department realized cost savings by improving business practices then most or all of the savings should stay with the department to be invested in future improvements (a one-time carry-over into the next budget period) and/or distributed as reward to those responsible for the improvements, as an incentive to continue making such improvements. If costs were lower because the department didn't accomplish everything they set out to do then that might be a justification for reallocating their budget, and/or implementing more drastic changes to get them back on track.

> Your point about average cost just means that you’re budgeting on the wrong timeframe.

The timeframe for the budget would generally be predetermined (e.g. one fiscal year) and not set by the department itself.

> If you estimate your average dinner is $100 but you’re spending $75 most of the time except for one huge dinner every month then you should be budgeting $75 for dinner and then budget separately for one large dinner a month.

Sure, but I was referring to probabilistic variation due to uncertainty in the forecast, not a predictable mix of large and small expenses. And the "dinners" in this analogy would be once per budget period (i.e. annual for most organizations), not frequent enough to average out.

[abduhl]

I think we agree in general and are just quibbling about the details of how to budget correctly (timeframes, line items, etc.). Most of the issues that come up with these stories of people getting their budgets slashed if they don't spend enough or having to buy a bunch of bullshit at the end of the year are just a result of poor budgeting at some point which has been allowed to continue.