Tuesday, October 24, 2006

Stop! It's Budget Time

For many managers across the country, now is simply the worst time of year. It's when they start working on budgets for 2007. Nobody thinks about it much, but this 30 day window (or so) probably has more effect on productivity and economic growth than any other single factor.

I'd also say that it is a process that few (if any) economists really talk about. A simple example should illustrate my point as well as illuminate why businesses operate more efficiently than government.

How a manager determines his budget:
  1. Analyze the previous year's budget.
  2. Modify expenses based on changes in business practices - changes in headcount, maintenance costs, inflation, etc.
  3. Brainstorm all of the projects that you would like to complete for the entire following year.
  4. Work with several vendors for each project to determine likely costs associated with project completion.
  5. Complete Return on Investment and Total Cost of Ownership analysis on all proposed projects..
  6. Throw out all of the ones that don't pay for themselves in a reasonable amount of time.
  7. Show the proposed budget to your boss who tells you to cut 10%.
  8. Cut corners, make some dificult decisions, put off some projects until the following year.
  9. After showing the budget to your boss, he tells you that Marketing wants to do X, so you will have to budget for Y - and you aren't getting any more money to do it.
  10. You make all the changes, miraculously finding enough corners to cut to make it all work.
  11. Wait for the executive committee to approve all budgets - getting yours back 10% smaller than it was just a couple days ago.
How a government manager determines his budget:
  1. Sit back and have a glass of champagne - your 5% uplift was built into the legislation that created your department.
So, while businesses are fighting to fit larger pieces of pie into smaller slices, government is content with getting bigger and bigger all the time. I think this is also part of the reason that business people tend to be sympathetic to small government ideals (I almost said Republican - oops), they know that it is possible to do more with less because they do it every day.

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