In a recent Chicago Booth Review online article [CLICK HERE TO READ], Paul H. Décaire and Denis Sosyura report on their study that investigates the impact of corporate budgeting practices on business outcomes, particularly focusing on the tendency for managers to engage in excessive spending before the end of the fiscal year to avoid returning unspent funds. Analyzing data from Nielsen and NielsenIQ, the researchers highlight how this behavior leads to lower sales and weaker margins.
They reveal that top executives delegate operational decisions to lower-level managers, who operate within preset rules and deadlines for budget allocation. While intended to maintain fiscal discipline, this approach often results in reactive spending rather than strategic investment. Examining advertising outlays among American companies, Décaire and Sosyura find a significant surge in spending before budget resets, particularly by managers with surplus funds. Conversely, those who have exhausted their budgets cut spending drastically.
Their research demonstrates a clear link between last-minute spending spikes and diminished investment efficiency, with projects funded during this period yielding lower returns. This trend is more pronounced in companies with hierarchical structures and lax internal monitoring.
Décaire and Sosyura's findings underscore the need for a more nuanced approach to budget management, emphasizing strategic allocation over reactive spending. By challenging traditional budgeting practices and advocating for greater transparency and accountability, they provide valuable insights for businesses seeking to optimize their financial strategies in a competitive environment.
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