Why Are Annual Budget Cycles Still A Thing?

28 Jan 2020 3:05 PM | Annmarie Uliano (Administrator)

by Don Kennedy, Ph.D., P.Eng., IntPE, CPEM, FASEM

I was recently surprised by a client who was pushing to spend more to finish a construction project during a winter cold snap. When asked for a reason, the response was one that I had heard many times decades ago: “In January the money dries up.”

Some organizations manage tight budgets by using a time limit on the availability of scarce financial resources. A manager is given an allotment of funds to spend however they deem appropriate for a specific purpose, but only until the end of a fiscal cycle. Then new moneys become available for new specific purposes in the next fiscal cycle. 

An analogy I have often used is to imagine if personal spending was treated this way. Your child comes home with broken teeth from a playground incident. You look at the crying child and announce, “We have funds allocated this year for a new home sound system. We have no funds set aside for teeth. Next year we will see if we can afford orthodontics, but for now we are going to the store for the sound system.” No one could afford to operate this way, so why do some companies still have fixed budget cycles?

At the ASEM conferences, I have heard a lot of stories of the suboptimal spending that comes from annual budgets. In one case, a delivery truck would pull up to the engineering office near the end of the cut off for funds. It was filled with especially high priced electronics devices their projects typically require. The company rules were that items had to be delivered by the end of the cycle. The engineers had funds to buy instruments they knew they would need, but the funds would evaporate within days. It was better for them to pay double for items now than to try and get new approval to buy them for much less later.

Many organizations base the new year's budget on the previous year's spending. If you are a manager and you save too much money, you are penalized by cuts to help support the manager who overspent the year before. People who read this publication include those who can now, or will in the future, influence organizational policies. Please do not just accept annual budget cycles as the way your team operates.

About the Author

Dr. Don Kennedy, a fellow of ASEM, has been a regular attendee of the ASEM conference since 1999, with particularly good participation at the informal late evening "discussions" (sometimes making it difficult to get to the morning plenaries). “Improving Your Life at Work” is Don Kennedy's ebook which includes a lengthy bibliography for people looking for references on management theory.

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