Is budgeting worth the effort?
If the Office for Budget Responsibility is incapable of doing much better than a crystal ball gazer without a crystal ball, what hope is there for the rest of us?
The news yesterday that the obviously misnamed Office for Budget Responsibility consistently assumed that growth stagnation was a blip rather than a fact is shocking. Judging by recent efforts, the more critical might suggest that they are specialists in irresponsibility with little idea of budgeting.
Frankly, it appears that the Chancellor of the Exchequer and his predecessor both based their economic strategy on information that was materially incorrect. As a result, they have been spending (our) money that wasn’t there.
A parallel might be an individual who ignores red letters from the credit card company and the bank, believing with no justification that the oversized overdraft and exceeded credit card balance do not relate to them. Sadly, this also appears to be a common occurrence that has led many to destitution, homelessness and the need to claim universal credit via a system that has already been discredited even though it has barely started.
Presumably, economists working at OBR can offer some kind of a justification for their failures, but there does seem to be a strong case for giving them the opportunity to pursue alternative careers while scrapping the department and replacing it with something more reliable.
In the world of accountancy, budgeting is also often perceived as the solution to all ills, particularly by larger firms. Like the government, budgets guess what might happen in the next 12 months (and frequently the ensuing 48), and then use this data as a basis for constructing future strategy around employment, pay and even profit-sharing.
As with the government, if the input data is accurate then all will be well as the firm grows exponentially, possibly even beating the budgeted targets, putting smiles on the faces of partners and, if they are relatively generous, their staff as well.
The corollary to this is so obvious that anybody but the government and all of those firms that have been merged out of existence in recent years can work out without testing too many brain cells.
If you assume that your firm is going to grow by 10% each year and it fails to do so, then trouble lies ahead. The starting point for many practices might be to revisit their accounts and try to ensure that they get a little closer to that 10% figure than might otherwise have been the case. In a different industry, this seems to be what Tesco tried to do, leaving executives out of a job and potentially heading towards prison.
What those in this position ought to do is cut drawings drastically but most prefer to dig their heads ever deeper into the sand.
Two or three consecutive years of failure to hit those targets will then have much more serious consequences. First, equity partners discover that their profit shares have not only diminished but disappeared. Next, the top performers will leave, finding a zero top-up to drawings unacceptable. The sorry cycle finishes when it becomes apparent that those remaining are unable to dig the firm out of trouble and have little choice but to seek external assistance, either through the merger route or more drastically, some kind of agreement with creditors.
Having seen this so often in our profession and many others, it will be interesting to watch the Chancellor of the Exchequer and his fellows trying to avoid a similar fate, particularly given that the budgeting disaster has taken place at the same time as economic uncertainty has been ramped up by the decision to leave the European Union without any coherent plan for doing so.