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Comment by herbcso | Hacker News Reader

I've never understood this about budgeting. So you allocate. A budget. These are fund YOU ARE PLANNING TO SPEND! So, OK, you DON'T spend them this year. Why the fuck don't you get to SAVE THAT MONEY!? No, instead you are punished for now spending it all and you cannot create a realistic budget for next year - why the hell not!?

Sorry, but this frustrates the hell out of me! What am I missing here? What arcane bit of finance lore leads us down this path? Am I just hopelessly naive? Is acing money such a bad thing!? I just don't get it...

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Your frustration may come from a good place, believing gov and big orgs want to be efficient. They don't and they don't have to. They are super efficient when it comes to taxes though. At least in my country, every department is trash except the revenue service which is so forward thinking and effective, they put private business to shame.

This definitely rings true.

But I'd say it's not a feature of governments only, any sufficiently big organisation which centralise power ends up being like this. That's why large corporates need nimble startups to innovate: startups either innovate or die.

The government is just the largest example of this phenomenon - and they don't have any analogue for startups, they're just doomed to grow larger and larger over centuries until they collapse.

Look at the USA, once the perfect minarchist experiment and now the largest employer in the world.

Not here in the US. The IRS has been crippled by previous Republican administrations to the point of uselessness, as another method of giving free unlimited tax breaks to the millionaires and billionaires that bought them in office.

But god help the poor people who file simple tax returns that can be easily audited, however.

If you don't reduce your budget next year, what does "save that money" mean to a department in a company? If this year I have 105% of last year's budget (because they always go up), what am I supposed to do with the 20% surplus from last year? Most companies wouldn't even have a place in your cost center to track a surplus, it's such a foreign concept.

Zero based budgeting is one answer to the moral hazards of either over or under-estimating your budget on purpose. If each year you start with a blank spreadsheet and then add (with justification) expenses for the year, it avoids some of the pitfalls. Not a panacea however.

https://en.wikipedia.org/wiki/Zero-based_budgeting#Advantage...

> (because they always go up)

Ahah, that would be nice. In most company I know, they are shrinking every years, because you know, “cost reduction plans”.

Just brainstorming, but maybe the irony is that your scenario somehow has even worse incentives? For example, building up that rollover number would gamify thriftiness greatly exceeding the typical "oops didn't spend it all," and think about the consequences of when you DIY something you're not the best at instead of hiring the pros.

For two reasons:

1) separation of duty: you might not be the best department to invest surplus

2) cost effectiveness: if you're operating with a deficit, as is generally the case with governments these days, this money is not free, so it could effectively be cheaper to give it back and re-borrow it when you actually need it

> 1) separation of duty: you might not be the best department to invest surplus

But with this reasoning there is no surplus, because departments will spend their money at all cost.

> 2) cost effectiveness: if you're operating with a deficit, as is generally the case with governments these days, this money is not free, so it could effectively be cheaper to give it back and re-borrow it when you actually need it

That's totally fine, when GP said “Save the money” they didn't meant “on their own bank account”. It just means: the top management owe them this money when they'll need it later.

Anecdote: I'm currently working on a project started in emergency earlier this month, which must be done before the end of the month (because it's the end of the accounting year at this company) for this exact reason. And this project is overprices by a factor close to two, because this money really had to be spent!

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.

> 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.

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.

> 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.

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.

It is about opportunity costs. The budget you did not spend could have been spent elsewhere in the meantime and since it didn't get invested elsewhere, it's not a savings, that's a net loss, because of course anything less than 100% utilisation of 100% of "resources", 100% of the time is a loss .. Or some such.

That's probably because of this kind of reasoning that people just throw away money threw windows, because “gotta get rid of it all”.

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