Budget: What Budget?

The so-calledRyan budget that occupies so much news space, as its author does televisednews-talk shows to explain it, misses an important point. Its center piece is togo after one of the large transfer payment generating machines in government,Medicare. Government payments to individuals, whether they are mailed or directdeposited, are called transfer payments. Two of the other large transferpayment generators are the Social Security Administration and the VeteransAdministration.

The importantpoint to consider is that government programs are overhead and therefore arefixed expenses. While it is true that transfer payment amounts are trendingupwards and will continue to do so as the post-WWII generation reachesretirement age, they are still fixed expenses which are only part of a budgetequation. The other two parts of the budget equation are variable costs, alsoknown as the cost of doing business, and revenue. Business revenue comes fromsales. Governmentrevenue comes from taxes.

Budgets thatpropose to reduce revenue work when a business plans to downsize as a companystrategy. For example, instead of making a 2% margin on a volume of $20M inrevenue, a $400K profit; the downsize strategy is to make a 10% margin of $10Mrevenue, a $1M profit. You can see why a budget that cuts fixed expenses andreduces revenue is unsellable to a board of directors and to stockholdersunless the strategy is to downsize the business. So is the idea of downsizingthe federal government and reducing taxes. But that is a political digression.

A budget or thelack of a budget is an elephant in the living room of a business. Many times,as a management consultant, myjob has been to say to business owners, “Hey, you have an elephant in yourliving room. What are we going to do about it?” Then come the excuses that it’sin their head or that their accountant does it or that they have a spreadsheetthat they purchased with their business plan online or that they are working onit, etc.

Any planningthat a company tries to make without a budget is a shot in the dark or someother metaphor connoting guesswork. Many times entrepreneurs lack businesstraining per se, which is why they goto SCORE [Service Corps of RetiredExecutives] or they bring in a consultant. Many business owners make the faultyassumption that their accountant takes care of their budgeting for them. Theaccountant is a good person to ask about the arithmetic, but generally speakinga budget is not an accountant’s job.

Anaccountant’s job is tax, just as an attorney’s job is law. In my view, the onlytimes that a business owner needs advice from either profession is when theyare dealing with the IRS or dealing with contractual matters. They both are withoutdoubt the wrong professions to ask for business advice. Asking an accountant forbusiness advice is like driving a car and trying to see where you are going bylooking in the rearview mirror. An attorney can only tell you for certain whatroutes 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 atthe same financial data. Each is a different audience, if you will. They lookat 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 thateverybody looks at are overhead, considered a fixed expenses, and costs, whichare considered variable expenses. Revenue is the paramount consideration forbusiness.

“Why are youin business?” is a straight forward question with only one correct answer: tomake a profit. You would be amazed at how many times business people tellelaborate tales in answer to that question about providing something for theirfellow human beings or some such thing. Others seek to revolutionize somethingor to create new atmospheres. It sounds good but it does not matter. Making andprotecting profit is the only thing in business that matters. Business cannotsucceed at that venture without a budget and an organized, annual budgetingprocess.

Butgovernment is not a business. Balanced budgets exist in business. Revenue minusexpenses minus costs equals profit. Prudent business management is all aboutbalancing revenue and costs to achieve profit. Successful management thinksinside the box, because that’s where the money is. Budgets make profits happen.

The idea of afederalbudget is relatively new. You will not find a federal budget mentioned inthe Constitution. The Budget and Accounting Act of 1921 created the U.S.General Accounting Office as part of the Legislative Branch to audit the federalbooks and prevent fraud. The 1921 legislation created the Bureau of Budget inthe Executive Branch to coordinate budget submissions by various departments andagencies. By the 40s, the idea of a balanced budget was so much old politicalrhetoric. Political parties say things they think that voters want to hear. Thatis what the Ryan budget does. That is all that it does.

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