The so-called
Ryan budget that occupies so much news space, as its author does televised
news-talk shows to explain it, misses an important point. Its center piece is to
go after one of the large transfer payment generating machines in government,
Medicare. Government payments to individuals, whether they are mailed or direct
deposited, are called transfer payments. Two of the other large transfer
payment generators are the Social Security Administration and the Veterans
Administration.
The important
point to consider is that government programs are overhead and therefore are
fixed expenses. While it is true that transfer payment amounts are trending
upwards and will continue to do so as the post-WWII generation reaches
retirement age, they are still fixed expenses which are only part of a budget
equation. The other two parts of the budget equation are variable costs, also
known as the cost of doing business, and revenue. Business revenue comes from
sales. Government
revenue comes from taxes.
Budgets that
propose to reduce revenue work when a business plans to downsize as a company
strategy. For example, instead of making a 2% margin on a volume of $20M in
revenue, a $400K profit; the downsize strategy is to make a 10% margin of $10M
revenue, a $1M profit. You can see why a budget that cuts fixed expenses and
reduces revenue is unsellable to a board of directors and to stockholders
unless the strategy is to downsize the business. So is the idea of downsizing
the federal government and reducing taxes. But that is a political digression.
A budget or the
lack of a budget is an elephant in the living room of a business. Many times,
as a management consultant, my
job has been to say to business owners, “Hey, you have an elephant in your
living room. What are we going to do about it?” Then come the excuses that it’s
in their head or that their accountant does it or that they have a spreadsheet
that they purchased with their business plan online or that they are working on
it, etc.
Any planning
that a company tries to make without a budget is a shot in the dark or some
other metaphor connoting guesswork. Many times entrepreneurs lack business
training per se, which is why they go
to SCORE [Service Corps of Retired
Executives] or they bring in a consultant. Many business owners make the faulty
assumption that their accountant takes care of their budgeting for them. The
accountant is a good person to ask about the arithmetic, but generally speaking
a budget is not an accountant’s job.
An
accountant’s job is tax, just as an attorney’s job is law. In my view, the only
times that a business owner needs advice from either profession is when they
are dealing with the IRS or dealing with contractual matters. They both are without
doubt the wrong professions to ask for business advice. Asking an accountant for
business advice is like driving a car and trying to see where you are going by
looking in the rearview mirror. An attorney can only tell you for certain what
routes not to take and will find ones not to take that you never knew existed.
To be fair,
the accountant and the attorney and the banker, for that matter, all look at
the same financial data. Each is a different audience, if you will. They look
at different things in addition to how they are going to get paid for looking,
which is its own consideration. The major sections of the financial data that
everybody looks at are overhead, considered a fixed expenses, and costs, which
are considered variable expenses. Revenue is the paramount consideration for
business.
“Why are you
in business?” is a straight forward question with only one correct answer: to
make a profit. You would be amazed at how many times business people tell
elaborate tales in answer to that question about providing something for their
fellow human beings or some such thing. Others seek to revolutionize something
or to create new atmospheres. It sounds good but it does not matter. Making and
protecting profit is the only thing in business that matters. Business cannot
succeed at that venture without a budget and an organized, annual budgeting
process.
But
government is not a business. Balanced budgets exist in business. Revenue minus
expenses minus costs equals profit. Prudent business management is all about
balancing revenue and costs to achieve profit. Successful management thinks
inside the box, because that’s where the money is. Budgets make profits happen.
The idea of a
federal
budget is relatively new. You will not find a federal budget mentioned in
the Constitution. The Budget and Accounting Act of 1921 created the U.S.
General Accounting Office as part of the Legislative Branch to audit the federal
books and prevent fraud. The 1921 legislation created the Bureau of Budget in
the Executive Branch to coordinate budget submissions by various departments and
agencies. By the 40s, the idea of a balanced budget was so much old political
rhetoric. Political parties say things they think that voters want to hear. That
is what the Ryan budget does. That is all that it does.
