The company budget is based on the ‘Use It or Lose It’ budgeting approach. As such, various departments have the propensity to utilize idle financial resources toward the end of every financial year. It is generally observed that this spending tendency is ostensibly based on the notion that the remaining financial resources will be refunded to the company accounts, which will lead to imminent budget reductions for the affected departments. Several anecdotes and scientific evidence are available to demonstrate increments in year-end spending, specifically in organizations, including public, not-for-profit, and private ones, using the ‘Use It or Lose It’ budgeting method (Liebman & Mahoney, 2013; Angelov, 2014; Fichtner & Greene, 2014).
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In the company, available evidence suggests that significant fractions of spending take place near the end of every financial year. It is also observed that most departments are unable to spend their allocations uniformly throughout the fiscal year. In the last few months, however, many departments usually spend about 30% to 40% of their yearly financial resource allocation. It is also imperative to recognize that not all departments exhibit increased spending tendencies toward the end of fiscal years.
For instance, the Sales and Marketing department has been consistently spending less than 11% of their allocation toward the end of financial periods. Nevertheless, many departments notably spend more money during such periods.
The increasing trend of year-end spending is noted in the financial reports for the fiscal years assessed across various departments, and this trend is not unique to the past five fiscal years. Rather, fiscal statements dating back more than 15 years show that increment in the year-end spending has become the practice, irrespective of the management team.
The ‘Use It or Lose It’ budgeting approach offers an incentive for most departments to spend all funds available in their budgets, irrespective of whether such spending drive values, are cost-effective, or help in curbing wastage. It is therefore observed that these spending patterns are not optimal, and they are associated with rampant wastage of financial resources, which in turn leads to higher costs of operation. The company should therefore discard the ‘Use It or Lose It’ budgeting approach.
In this regard, alternative approaches are available to curb wasteful spending across many departments (McIntire, 2006). The company should allow departments to do a restricted rollover or carryover of the remaining funds not utilized within the financial year to the next fiscal period. Further, the company should conduct a preliminary exercise with one of the affected departments to determine the feasibility of this approach. A department will only be allowed to carry over a given percentage of the left funds.
The carryover method will lead to savings by reducing notable waste. To enhance positive outcomes, only departments that demonstrate actual cost-effectiveness efforts will be allowed to carry over their funds to the next fiscal period. The finance department will supervise, audit, and assess the exercise and then provide its report.
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The company must acknowledge that these financial reforms will result in some unwanted administrative burdens and alter the current budget, spending, and practices. However, these are short-term challenges. Hence, the company should focus on long-term benefits, such as eliminating the pressure to spend all financial resources and reducing wasteful spending. Moreover, even if these year-end spending increments were not necessarily wasteful, departments will enhance efficiency in spending without strict deadlines.
The company should abandon the ‘Use It or Lose It’ approach method in its budgeting. Instead, it should adopt carryover to enhance cost-effectiveness, reduce wasteful habits, and increase efficiency in budgeting.
Angelov, B. (2014). Expiring Budgets and Spending Sprees: The Cost of Use-it-or-Lose-it Budgeting. Chicago Policy Review. Web.
Fichtner, J. J., & Greene, R. (2014). Curbing the Surge in Year-End Federal Government Spending: Reforming “Use It or Lose It” Rules. Arlington: Mercatus Center.
Liebman, J. B., & Mahoney, N. (2013). Do Expiring Budgets Lead to Wasteful Year-End Spending? Evidence from Federal Procurement. Cambridge, MA: National Bureau of Economic Research.
McIntire, T. (2006). Break the Use It or Lose It Cycle: Six Strategies for Curbing Undisciplined Technology Spending. Technology & Learning, 26(12), 28.