Is budgeting worth the effort?

Businessman's hands with calculator at the office and Financial data
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Philip Fisher
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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.

About Philip Fisher

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By DJKL
11th Oct 2017 15:50

It is different for them, they got a John Bull printing set for Christmas so can extract themselves from the mire whilst at the same time burying within all those members of the public who were prudent enough to hold emergency funds in a deposit account/rely on UK earnings in sterling.

I have just finished stage 2 of repositioning my SIPP out of UK earnings and into anything but UK earnings (though also not that keen on euro earnings) so roll on Asian, Emerging markets, India, North America, now up to circa 75% non UK earnings and am holding the house in Sweden meantime as a further currency hedge on the euro (SEK tends to shadow)

In the meantime my son is busy earning euros in Frankfurt which are either being kept in a euro account with a German bank in Frankfurt or exchanged to his dollar account.

Watching the trend to forecast the future, anyone else note Goldmam Sachs just took a lease on 8 floors of office space in Frankfurt, as always, follow the money.

https://www.bloomberg.com/news/articles/2017-10-04/goldman-sachs-agrees-...

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to DJKL
11th Oct 2017 17:55

I seem to remember Goldman Sachs predicting $200 oil in 2008. The so called experts don't always get it right.

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By DJKL
to Knight Rider
11th Oct 2017 23:31

They may not be getting it right as forecasters but their actions, and those of others, may in themselves make their forecasts correct; irrespective of projections the fact is they will be, it appears, recruiting another 600 staff in Frankfurt to be at the heart of European banking.

Having visited it late July this year I was struck not only by the central high rise offices but also by the sheer amount of satellite office space surrounding Frankfurt-Eschborn, near my son's flat, seems to be teeming with back office provision servicing the more front end banks in the city.

Of course it helps as a draw that they have the HQ of the European Central Bank.

The longer we have to wait for something definite re cross border banking and finance post 2019 the more we will have already lost, and frankly once functions have been relocated it is pretty unlikely they will really consider returning.

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12th Oct 2017 16:52

@DJKL, city of london is dying on its backside right now.

Huge number of jobs flying out of it, or will be, regardless of what happens.

Of course our Bexiters will tell me this is #fakenews but its whats happening on the ground. Lloyd's of London syndicates are off to Ireland for example. HSBC is pretty much emptying their tower, some is going to Manchester, but a lot isn't.

No-one much likes a banker or an insurer, until you count the tax they pay to the treasury.

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By DJKL
to ireallyshouldknowthisbut
13th Oct 2017 15:44

Hard to keep a total running tally, but there have been a fair few announced and others ,I suspect, are still in planning. Right now I wish we were letting property in Frankfurt rather than Edinburgh, albeit not convinced too many banks would want our properties as offices(unless they were thinking about demolishing them and building something new)

Where I have concerns is the spin off effect to the UK satellite cities, there has always been a southern pull effect but if space in London becomes available/prices soften, because the bigger operations have partially decamped abroad, this could lead to a slow down in Manchester and Edinburgh; Nationwide decamped their commercial property operations out of Manchester last year (we used to bank with them) and Edinburgh seems to have an absence of news which in itself is ominous (usually some chatter/activity)

For us the million dollar question is what is going to happen with Royal Bank, their operations have a massive impact on the Edinburgh property market and if prime office space starts becoming abundant up here this will ripple right down into the tertiary market where we operate.

On the plus side we have massively reduced gearing (75% reduction since 2008) and massively increased liquidity just in case the market starts to see some seismic tremors.

I did actually prepare a five year detailed budget plan last year (so yes, they do have a use) and a 10 year outline plan, and to date we are on target, but key will be the level of occupancy we maintain.

As a safeguard the liquidity cushion (cash in bank) now held is nearly 50% of annual rents in all three rental business entities, having not had a great time after 2008 it is certainly now once bitten twice shy.

We are likely very similar to a lot of business entities who are reported, in the UK, to be hoarding cash;-hence low growth within the UK.

A combination of Banking Crisis, Indy Ref 1, Brexit and will we/ won't we have Indy Ref 2 is certainly casting its shadow over activity up here, we have been in sluggish territory re commercial property now for nearly ten years and frankly I do not see much changing for the better for at least another 3-4 years.

Still, on the positive side down to a three day week-as no development activity (the interesting part of my job) I now do not have enough to do to fill five days. (Except posting on A Web)

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12th Oct 2017 20:30

Is budgeting worth the effort?

If you have to ask the question; think again!

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