Budgeting for trouble

Kaynos Chipangura

Back in the 80s and 90s there was a group of people who gained notoriety for having the most illegible handwriting in this part of the world. These people were not doctors (who continue to be perennial contenders for the honour), but were known as bus conductors. Their roles on the bus ranged from opening and closing the bus doors to let in or let out passengers to writing out manual tickets. The ticketing process involved the conductor manually noting the pick-up points, destinations and sometimes registrable luggage for each passenger. It was a delicate act as the conductor had to do the writing while trying to pick and maintain balance in a bus that would be rumbling on bumpy roads not forgetting the unannounced sudden braking by the driver to pick or drop passengers.

The “write-while-balancing” act mimics what is happening or may happen to corporations and individuals genuinely seeking to create working budgets in volatile, uncertain, complex and ambiguous (VUCA) environments. The year 2023 has just started and my compliments and good wishes go to all who shall be reading this article. The onset of a year often brings to the fore the need to compile and make use of a financial planning tool called a budget. The past year had, on both the local and international scenes, a fair share of VUCA moments some of which have spilled into 2023.The world saw the “demotion” of Covid-19 from being the sole and largest socio-economic concern with the Russia-Ukraine conflict taking that pole position. The latter had, and continues to have, global impact on supply chains ranging from agro and petro-chemical products to food and is then amplified by “home-grown” local circumstances.

Corporate bodies, whether they be for-profit, governmental, not-for-profit or social, are expected to have a budget for the dual purpose of charting the path into the future and assessing adherence to that path. Management and other stakeholders probably met in 2022 and continue to meet in 2023 to deliberate on the 2023 budget yet most likely none of them seems to be clear on what credible assumptions to use. This is because the recent past has shown that “anything can happen at any time”. In the not-so-distant past we sat with a Board sub-committee on Finance & Audit of a listed entity to review budget parameters. We ended up with more than five guesstimates on where the exchange rates, inflation rates and other budget-defining elements would be. Each party “felt” strongly about their figure but sadly, there was no matching compelling information to back the numbers.

The fundamental question is whether an organisation formally admits the inability to look into the future and work each day as it comes or takes time to prepare something that would, from the start, be known to most likely be rendered irrelevant as the times roll out? Secondary questions would be on how to prepare such budgets and how much of the management’s head or neck should be put on the block for “failing” to meet the approved budget? As part of preparation, I combed the minds of colleagues who are either accounting practitioners or business leaders regarding how they have prepared or are preparing budgets in environments characterised by high inflation, currency, exchange rates and policy changes. One of the predominant methodologies that came up was that a solid budget would be prepared in a stable currency and then converted to local currency using a forecast average exchange rate. Actual performance, though reported in a local currency would have to be bench-marked to the stable currency using obtaining average exchange rates for the period under review. The initial foreign denominated parameters are derived from prior periods when the country was using predominantly foreign currency for measuring economic transactions and financial reporting. They are then adjusted for obtaining pricing realities given the changes that have taken place regarding the United States Dollar which is a predominant traded currency in many economies of the world.

The second option, which is not hugely different from the previous one is to go for an ideal budget assuming all is well accompanied by a stress or worst-case budget based on predictions of economists and other fundi on economic matters. Budget assumptions, and resultantly the budget, are then adjusted each time there is a significant unforeseen and often unfortunate development to cater for the new reality. Both methods emphasise continuous course correction which then requires a body to solely deal with budget control and management much like a navigator who assists a motor rally championship driver. This party must repeatedly update worksheets and other data input portals so as to have numbers that reflect the latest possible realities. Failure to have such a resource often results in the accountant spending a lot of time trying to adjust  the budget yet by the time they finish, another wave of change would have hit rendering it irrelevant. Adjustments to the budget need to be also accompanied by corresponding changes to the operating strategy which has to be equally agile in pursuit of an elusive and moving target called profit.

Non-participation of other stakeholders in the compilation of, and subsequent adjustments to, the budget frequently results in it becoming a “Finance Department’s” budget. The other parties can choose, at one moment, to embrace it when it shows favourable variances and, in another instance, give it a “Finance Department” parentage when it shows unfavourable variances. A favourable variance often has many parents while an unfavourable variance becomes an illegitimate child who gets dumped on the mid-wife’s feet. Budget-led meetings easily end up as “blame-storming” events where the Finance team gets maligned and pummelling for unilaterally fixing and twisting exchange rates and other budget parameters. At the time of writing, I was reading a book by Rolf Dobelli titled “The Art of Thinking Clearly”. It sets out sobering thoughts on dispelling various fallacies that affect personal and corporate decision-making including the “Sunk cost fallacy”. The fallacy is about insistence on patently failed courses of action on the mistaken belief that past expenditure on the same makes it impossible, unnecessary and or unreasonable to stop. Dobelli demonstrates that past expenditure on a course of action is not relevant when deciding on whether or not to continue with a project if it is clear that failure is almost certain. In the same vein the budgeting process in general and more so in VUCA circumstances needs to be brutal and naked enough to discard emotional and sentimental past decisions whose certainty of future returns is either scarcely existent or non-existent. At the end of it all, being lied to is unfortunate but lying to one-self is tragic.

  • Chipangura is a fellow member of ICAZ with experience in the Manufacturing, Mining and NGO sectors in Africa and the MENA regions. — [email protected].

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