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.
cleanscotch t1_j2e9kry wrote
Reply to ELI5: Why do companies require annual budget be spent 100%? by angrybird7677
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.