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.

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.

It’s not so much a set in stone requirement, as much as a practical reality of budgeting. If the business owner sees one department consistently not spending their full budget, they think that department doesn’t need that budget.

Now in large corporations the ones making those decisions are disconnected from actual operations, so they don’t know the broader context of why that budget wasn’t used

Tl;Dr: assholes with business degrees

I worked for the US government my entire career, and this always drove me batshit. My budget was a “mandatory spend”, whether useful or not. We’d buy promotional giveaways just to spend the money. Think about that…a federal agency buying can cozies because if we didn’t spend the money allocated to us, we’d get a smaller budget the following year. It just seems to encourage fraud, waste, and abuse.

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Depends on the Company. In corporations that use Zero Based Budgeting what you spent last year or what remained in your budget is irrelevant. You have to completely rejustify your budget every year. It’s definitely way more work than just carrying over the previous budget but discourages the above notion where departments want to fully spend the previous budget In order to keep that same amount the following year.

My employers spend their life explaining that THAT'S NOT HOW IT WORKS.

Idiot companies operate such policies because the middle-managers want to constantly keep upping their budgets to look important, so they have constantly growing budgets, that nearly overrun all the time, to make it look like they don't have enough. Then some idiot above them just approves more money.

The same kind of middle management is also after money on their own pet projects, so when you come in £10k under-budget on one thing, they will want to spent that £10k elsewhere on something they care about. You've now "lost" that £10k permanently. Thus the only way to combat such idiotic financial management is to always use up the budget each time so they can't justify cutting it.

In any company with an ounce of common sense or financial management, that's not how it works. Many of my employers over the last few decades have had to actually announce regularly that that's just not how it works, because people come in from elsewhere with the natural *impression* that that's how it works everywhere. It's not true. And, unchecked, it will repeat even in workplaces that don't practice such idiocy because of people expecting it to work like that.

I manage several budgets in the 6-figure ranges, I basically go out of my way to make them as cheap as possible without compromising on anything. It's usually easy to do so, because there's a lot of nonsense wastage like this everywhere I go. I sometimes do "deals" too - look, I will cut out this £10k piece of equipment that was budgeted, replace it with a £2k thing that does everything we need but, and this is important, I want £5k of that saving to go on that thing you denied the other day because we didn't have any money for it. Agreed?

More often than not the employer gets what they need, they get a saving AND I get the thing that my department's been after for years. I just started at a new workplace and have already done this twice.

Because they actually LIKE people who can cut their budget and say "Well, yes, I'm sure that's a lovely piece of kit... but we don't actually need that level of equipment, we can do everything we need to do with a cheaper version without compromising on time or quality."

When I was self-employed many years ago, I would promise my clients that I would save them AT LEAST as much money as it cost them to pay me... and I always did so. Because there is just so much unnecessary wastage because of nonsense like this.

Budget-holders have a responsibility to have a low cost, but also to fulfil all their needs - present and future - from that cost. You also have a responsibility to know what's necessary and what's not because you hold the budget and therefore you should know... because the people above you DO NOT KNOW.

Padding your budget is fraud, as far as I'm concerned, and customers and even your colleagues are paying for that. Every penny wasted is more money that doesn't end up in your pay packet, eventually. Even if that's just in the form of "Hey, Jeff, you saved us £50k this year! Have a £500 bonus!".

Places that operate like this often don't know that it's happening, don't want it to happen, or limited to only a layer of middle-management that do it for their own status-symbol gain (e.g. saving money to then spend on vanity projects and sucking up to the boss). It's partly the upper-management's fault for not keeping it in check, but also they can't micromanage every budget and have to trust budget-holders.

But nowhere where there's any actual sense of budgetary control is it actually "official policy".

>why do such policy exist?

To justify funding; If they don't use it all, then next budget isn't going to assume they need it, which may not be the case.

This is also the case if the business is in any type of program that relies on their requirements. If they spend less, they might get less next FY

>Isn't it better to carry over unused expenses to the next FY?

Not necessarily.

From an economical point of view, money sitting in a bank account is wasted potential. It should either be spent on making the company better, or paid to shareholders. Otherwise, it's rapidly losing value due to inflation.

Because, if one department isn't spending all of their allocated budget, they means they don't need the amount allocated to them. And if they don't need it, some other department surely can use it because they didn't have enough allocated to them.

So department's try to spend their entire allocation so that when they actually do need it, it'll be there.

You don't need the money, right up until you do. And when you do need it, if you don't have that allocation to your department, you're SOL, you'll have to try to get it for next year's/quarterly budget.

Spending it just tells the people who make the budget that you do in fact need the amount allocated to you and to not give some of it to someone else.

You answered your own question, so you don't get less next year. It will make more sense if you understand it's not done at the company level, but at an individual department level. If you're the head of the IT department and you have $100k left over at the end of the fiscal year, the CFO might say "IT saved us $100k, maybe next year they can save us $200k!" and cut your budget accordingly. Now next year you have to replace a server, but you don't have the money. You go ask for more money and some of your bosses say "well, the head of IT doesn't manage her money very well, who else we got?"

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My company i worked for (large isp) bought all field service technicians new computers because we had to much money over If we didnt, next year they might give us a lower budget... So they spent money like crasy while looking for ways to save on other things. Like some money saving tactics were ridiculously backwards and making the job harder to do, but hey free laptops is ok. Companies are absolutely stupid

Budgets can be pretty big, and buying a few things extra to fill out the budget isn't a big deal.

Budgets get changed all the time. If you don't use it this year it may be gone the next. Getting authorization to exceed budget can be difficult, while spending what's already authorized is easy.

Take the converse.. if everyone is hyper incentivized to come in below budget you get scrooges that pay poorly, understaff and remove free coffee from the office. You get a bad place to work.

The interests of the company and the manager are not always perfectly aligned.

Overspending is bad and so most budget owners will aim to underspend for the year especially in the early months, so for example after 6 months of the year they’ve spent only 5/12 of their budget.

Having reached the final few months of the year, the manager now knows the risk of overspending has passed.

They now have a different risk - if they underspend this year then the base expectation would be the next fiscal budget would based on this underspend. (Budgettjng rarely starts from scratch and is an adjustment of them prior fiscal).

Therefore spending often increases in the later months so that over the full year the actual spending is within a few % of the planned spend, ideally on the underspend side.

As a cost accountant who set annual budgets for 15 years, it is because we take the money away if you dont spend it. We are usually trying to account for increased supply costs of 3-5%, plus some random budget decrease upper managemnet pulled out if their butts, so uf you have a surplus, we will yank it so fast it will make your head spin.

This was a big problem working (as a civilian) for the military. Budgets literally required acts of Congress to change and the massive amount of departments allocated to each of them were so far outside of my control. It could theoretically be done a thousand times more efficiently but that would require a whole bunch more micro research and management that ends up being considered more trouble than it’s worth.

People are bad at estimating things, and its much harder to get more budget at most companies. So if you underspend and lose the budget, you have instant FOMO for the next year, and if you actually need more, it's a pain to get.

You might think but its so easy to lookup that you gave up a million dollars last year, why would it be hard to get 20k? And that's just one of the great mysteries of corporate finance.

You also have a general lack of real responsibility for checking this stuff. Proper accounting and estimation for budgets and efficiency is hard and time consuming. Very few companies truly try to do it. So you've got department managers blowing remaining budget last second, and no one challenging it, and things just keep on chugging along.

So long as the total budget for the company fits at the end of the year, there's not a lot of time spent looking into the details of that.

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The Office fans: Please refrain from posting only a link to that scene or a transcript. Remember that ELI5 requires explanations to be in your own words. You are welcome to include a reference to that scene in addition to an explanation in your own words.

I work in a certain sector with both medical and marketing budgets. The curtain was parted a few years back that if they didn’t spend the budget, they lost it that year and it was dropped by 20% the following year also. Some crazy shit happens come year end.

GREAT FOR ME

Otherwise they risk getting a smaller budget next year. People will argue that they didn't need the whole budget anyway.

It’s not required, but not using full budget is a great way to get budget reduced the next year and few managers want that…

It's to prevent misuse of funds and overspending. In a big organisation like a company not every single person working in that company is aware of how much money they have and how its being spent, there's departments whose jobs it is to do that but the rest of the people working in the company don't know, aside from some management positions who usually get an abridged run down of expenses. Smaller branches of bigger companies or organisations have their own accounting departments that are in charge of tracking expenses, making the budget and requesting money from the central accounting department.

So from the point of view of central management they prefer not giving out more money than is needed because that could lead to misuse, or at the very least unnecessary spending. From the point of view of smaller subdivisions though they prefer their budget not being reduced because in the off chance they have unexpected expenses their budget doesn't cover, requesting money and getting it approved is a long drawn out process. Also it's less work for them to receive lump sums and allocate them as they see fit than having to individually calculate and predict all expenses to a near zero margin of error, because that's pretty much impossible but also a lot more work for them. So the general tactic is to track spending for some time and once they get an average of yearly spending to request a bit more than that which gives them more leeway with spending, and is less work for them. The year goes by and expenses are covered and catalogued, and when the year is nearing its end if they see they have left over money they simply find ways to spend the money which justifies them receiving it in the first place, so that to central management it will seem like they need that amount every year so they'll get it next year too. If they find themselves short on cash it gives off the impression that either their accounting department/management is incompetent or that they're overspending, even if that's not the case.

TL;DR, it looks better when a smaller subdivision requests the same amount of money every year. If they request more than they initially got it seems like they're incompetent or overspending. It's less work for them and easier to operate with a budget that allows leeway instead of trying to fine tune it to be exact, which is impossible since there's always unexpected expenses popping up throughout the year. Central management on the other hand does not want to overspend because that cuts into profits and of course they want to prevent embezzlement, so all money allocated has to be accounted for and spent on something with the receipts and invoices to prove it.

For government departments if you don’t spend your budget they will ask why you are asking for more money the following year. So it’s best to spend it all

It's stupid. I always believed in zero-based budgeting. Yes, you can use the previous year's budget as a guide, but rushing to spend money just leads to waste. I used to work for a large corporate software reseller and the amount of crap customers/governments would buy just before their fiscal year ended was insane.

There is not usually an actual policy.

It's the fact that if a division shows that it can do the job with less resources then given they will be given less resources in the next budget, because why would it need more? it's shown it could do the job with less.

By spending the entire budget (even on seemingly stupid stuff) they can argue for the same or larger budget next time.

Let's say you run the IT department of a company. You had a great year with very few computer upgrades or replacements needed, so you only spent 4/5ths of your budget. Next year your budget gets cut by that 1/5th. Now you have a rough year where everything seems to break, and while you could have covered it with the old budget, you can't under the new one; and the higher ups have allocated that money elsewhere. Now your stuck trying to make do, and you look bad doing so.

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As a result, you waste/use up the remaining budget so it doesn't get cut next year.

Money left over is not being used to make more money, and should be allocated to areas that will use the money.

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. Underspending is a recipe for future unexpected expenditure.

>Isn't it better to carry over unused expenses to the next FY?

To measure performance (budget vs actuals) the budget needs to follow GAAP rules. The income statement is closed and resets every year. For the actuals, it is not possible to carry over income/expenses. The budget needs to follow a similar pattern.

Then there's a matter of tracking. If you did carry over unused expenses, it would be a big hassle to track net expenses. Is this $1 counted against last year's saves or this year's budget? And you'd need to do this by invoice line and by account. It would be easy to game the system by always counting against current budget and letting the previous reserve grow. You'd have to use some type of inventory accounting, FIFO/LIFO so that dept managers couldn't game the system.

OK sorry, I'm rambling. Net effect is that for the income statement, expenses do not carry over into a future year. The budget needs to follow the same convention.

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I've never heard of this policy ever existing, anywhere. I doubt it does. What does happen is that companies are always trying to cut costs from the top down.

In a hypothetical well run company, everyone tries to save unnecessary costs.

In most companies, it's a constant battle of higher management trying to cut costs and those lower down the rung wanting to get the job done and go home with the minimum of stress.

Lower management want to hit budget to not get bollocked / to get their bonuses, but they don't actually give a shit about the company's bottom line. If they can spend the money on stuff that will make their employees happier and make the work go smoother without those above them getting pissy, they usually will.

Why not give bonuses for reducing costs? That's really hard to do well. Likelihood is you'll just have managers completely fuck the business long term to hit short term targets. Better for them to not cut costs all the way they can than to gut the company in a year.

Companies don't want to carry cash over to the new year. Then its profit that gets taxed. Spend it on business expenses and it is tax free. Ideally, you'd spend that money on investments that improve the company's performance. I work in manufacturing, there is always a rush to spend your profits in Nov/Dec to update equipment.

Ot's a requirement at nonprofits that the whole budget gets used yearly. Because, you know, they're not allowed to make a profit

If a budget isn't spent, in a lot of cases it will be allocated elsewhere, so to maintain the budget, it all has to be spent.

ELI5 - If you're working on a craft as a group and the teacher gives you 10 glue sticks, they might notice you only needed to use like 3, and give you less next time because they realize they have you too much, and they can give it to another group that needs more glue. If you want to keep all the glue, the one way to show you needed all that glue is to use all the glue.

Don't spend £20 Billion this year. Clearly don't need £20 Billion. Here's £10 Billion instead.

All comments forget the most important aspect: Any unspent dollar at the end of the year is profit, and profits are taxed