Thursday, December 29, 2011

Budget: What Budget?

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.

 Article first published as Budget: What Budget? on Blogcritics.

1 comment:

Manoj Vyas said...

Its nice. thanks for sharing such a great post here business management .