> 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.
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.