Allocating operating funding in the public sector and the newsvendor problem

Abstract

Public sector managers, particularly those at the highest level of government, tend to view lapsed (or unused) funds at the end of a fiscal year as a consequence of poor management and/or inadequate financial controls. The aim of this paper is to challenge this view. We show that the planning environment in the public sector is in essence the classical Newsvendor Problem. This simple model argues that lapsed funds are a direct consequence of a manager doing his job properly; that is, lapsed funds occur from time to time when a manager is maximizing value for the organization. An extension of the model shows that allowing low-value year-end spending has an undesirable effect on the value of spending during the year and this suggests a role for a strong audit function for year-end spending.

Keywords:

• budgeting
• lapsed funds
• newsvendor problem
• value maximization

Acknowledgements

We thank two anonymous referees for their insightful comments and suggestions. These have improved the paper significantly.

Notes

1 See Leibman and Mahoney (2010, p 3). The explicit details of the measurement are included later in their paper.

2 See Chapter 5 of the 2009 Spring Report of the Auditor General of Canada available at http://www.oag-bvg.gc.ca/internet/English/parl_oag_200905_e_32545.html.