Putting the bite on budgets

In executing some hefty budget cuts the UK government is leading where many managers may have to follow, learning to wield that costing cutting axe without killing the business. Report by Sue Mann

We’re heading for a new age of austerity and belt tightening. In May the Chancellor of the Exchequer and the then Chief Secretary to the Treasury announced a £6.25bn package of public spending cuts as a first swipe at the UK’s huge £156bn deficit.

Quango costs, a freeze on civil service recruitment, delays or cuts to government contracts and projects, savings on IT expenditure (including ID cards), and consultancy and travel budgets were all targeted.

The general consensus seems to be that the decisions made by the Chancellor were sensible – and there’s more of the same, no doubt, in the June budget – but it leads to the question: How do you make substantial budget cuts without killing the business?

The Government has a massive task on its hands as it tries to whittle away that deficit, and it is a skill managers will increasingly need to master as the impact of all this austerity filters through the public sector to all other sectors.

After over a decade of boom, the last couple of years of bust, i.e. credit crunch followed by recession, may well have provided some managers with their first taste of budget cutting.

Of course, there are many other circumstances that can cause those well laid plans to be ripped up: Loss of a major client or supplier; a change in management; plain and simple over expenditure; a gaping hole in another department’s budget; and unforeseen circumstances, like erupting volcanos.

Chartered accountant Mike Bourne, Professor of business performance at Cranfield University – and co-author with Pippa Bourne of Instant Manager: The Balanced Scorecard, published by CMI and Hodder Education – says the cause for budget cuts can often be put down simply to poor forecasting.

“A budget crisis may arise as a result of not forecasting the future properly, for whatever reason. Sometimes this is impossible to do because the world changes so rapidly. 9/11 is a classic example. Its impact nearly put the giant Boeing Company out of business. Suddenly this very, very strong and powerful company found itself with a cash flow problem as customers delayed taking delivery of orders.”

On the other hand, Pippa Bourne, ICAEW’s regional director for the East of England, says: “Budget cuts are not always the result of a crisis. They can be part of a prudent examination of what is being spent and the value of that spending. Sometimes money is spent on something because it has always been done and circumstances have changed so that money no longer needs to be spent.”

On the issue of where and what to cut, Mike Bourne says: “The best approach is to ask yourself, ‘What can we stop doing?’ A lot of organisations simply stop parts of the business if the business isn’t there. I have seen this in the automotive industry where they operate separate production lines for each customer. Everyone working on the line wants to keep that customer happy because they know that their jobs are on the line if the customer pulls out.

“It is a common mistake to top slice, take a percentage off almost every budget line. It is much better to identify unprofitable activities and target these along with the overheads associated with them. That is a far more effective way because you take out a whole loss-making activity in one fell swoop.

“Also, if you take, say, 5 per cent off everything you risk penalising some of your most productive and possibly future profitable activities. Instead, you should be protecting parts of the business and taking money out of the rest.

“This is what the government is trying to do. It is protecting the NHS and one or two other departments and taking money out of elsewhere.”

This is an extract from an article in the July issue of Professional Manager.

Further information
Professor Mike Bourne and Pippa Bourne are co-authors of Instant Manager: Balanced Scorecard, published by CMI and Hodder Education. The book, and other titles in the series are available to readers at £2 off the recommended retail price (RRP is £9.99 for new titles), including free postage and packing. Order online at www.pressoffers.co.uk/HOD194 or telephone 0870 755 2122, quoting offer code HOD194. Lines are open Monday to Friday 9.00am to 5.00pm.

Articles, books learning modules and checklists on budgeting are available free to CMI members online at www.managers.org.uk/managementdirect

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