“March Madness” and the “Use it or Lose it” Budget Practice

As a budget manager, you have a pile of cash to spend within 12 months.  The end of the year is approaching and in the back of your mind you know that the £20,000 still sloshing around from underspend will be worth £20,000 on 31 March, yet when you wake up on 1 April, it will be worthless.  What do you do?

It is basic human nature to want to make use of this money whilst the opportunity presents itself.  Who wouldn’t?

However, viewed from the perspective of the overall organisation rather than the silo representing the budget holders department, is this really best for the organisation as a whole?

There is another dimension to this problem – the perception is that if your department spends less than anticipated in year 1, the perceived wisdom from those on high is that you don’t need such a large budget for year 2, so it is generally perceived that your frugal approach in year 1 is “rewarded” by a smaller budget to play with in year 2.  Added incentive to get spending.

I am sure that most people who have worked in government can recount stories such as rushed purchases of cameras that have never been taken from their packaging because many of us have smartphones now; people buying several years worth of paper-clips when the office was about to go paperless – we all have our individual tales.

The problem isn’t confined to the UK, where it’s called “March Madness”.  In America, they call it “Use it or Lose it” budget practice – “September Madness” doesn’t quite have the same ring to it.  Research carried out by Leibman and Mahoney in the US between 2004 – 2009 found that around 9% of the total annual budget was spent in the last week of the fiscal year.  If it were evenly distributed throughout the year, the weekly amount would have been 1.9%.  They also found that the quality of services and products bought at the end of the fiscal year was lower than for the rest of the year because of the rushed nature of the purchases.

The problem isn’t a new one – as long as there have been annual budgets, this mentality has prevailed.

In these times of austerity, this would seem like a relatively painless way to save money, and now is the time to start thinking about how to avoid this issue next March.

One of the solutions tested in the US by the authors of that report I mentioned earlier was roll-over budgeting, so that any budget saved in year 1 could be spent in year 2.   A small control group showed, as predicted, that this reduced year-end spending and prevented the purchase of second rate goods and services.  Although this doesn’t produce immediate financial savings, it creates a save now spend later mentality – better than the spend now, spend later mentality created by the current system.

Another solution might be for all underspends to be put it into an amnesty pot, with 50% used to achieve savings and 50% going towards a pot of money from which only contributing teams can bid – the incentive being that prudent financial practice is rewarded rather than penalised.  On this basis, you don’t get a reduced budget in the following year because you have acted prudently in the first year.

Edit: 29/9: I pitched this as a session at GovCamp Cymru on 27th September where several solutions were suggested such as 3 year budgeting – something which has been used effectively in parts of the nhs; incentives for budget holders who take a frugal approach to spending; communicating bad and good practice within the organisation; better communications between finance and budgetholders.  Here is a link to the session notes.

Edit;29/9: I think that one of the reasons why this issue hasn’t been effectively addressed before is because it is everyone’s problem and nobody’s responsibility.  It is too big for one team or department to try and tackle and requires some analysis of the problem, followed by testing different approaches against a control group and this can really only be effectively directed at a national level by a government, innovation lab or audit service.

One thing is for sure, whatever the answer, it will require a fundamental shift in budget holders perception of why they do what they do, seeing things from a bigger perspective.

If you have any ideas or stories of good practice, you are more than welcome to contribute them into the GovCamp Cymru discussion thread on the topic here.