Money for Nothing

The decision: Choose how much budget cushion to keep when several independent uncertain budgets are aggregated.

Single Expected Budget B is the expected annual spend for one budget.

Initial Cushion is the chance of staying within a budget as originally submitted. 50% is the “expected” budget, anything above expected is cushion.

Number of Budgets N is the number of budgets to be aggregated to “top of house”, i.e., the enterprise level.

Chance of Meeting Total is the risk tolerance for blowing budget at the enterprise level, expressed as desired chance of staying within total budget. Higher chance mean more cushion to absorb unexpected expenses, but also less funding available for productive initiatives.

Money for Nothing is the result of establishing a risk tolerance at “top of house” where it is best managed, freeing up excess cushion across the enterprise for productive use.

Key Assumptions. For simplicity, the app uses a fixed 20% standard deviation around Single Expected Budget B and assumes independence between Number of Budgets N. Neither of these assumptions is required for an application built with real stochastic data.

Using the App

1. Set Initial Expected Budget B and Initial Cushion (or accept defaults)
2. Set Number of Budgets N (or accept default)
3. Adjust chance of Meeting N Total – see how lowering the chances increases “Money for “Nothing”
4. Click the Revised State button, now the top panel displays the reduced cushion in the individual budgets, and increased chance of exceeding an individual budget. Toggle the button to compare initial and revised states.
5. Refresh to start over and try out new scenarios!