John Heywood's proverb, "Cut your coat according to your cloth," serves as an enduring reminder of the importance of living within our means. This principle is especially crucial when it comes to managing public funds, such as taxes. The duty of care in spending other people's money is high, and recent budget blowouts in infrastructure projects and government initiatives have raised legitimate concerns about fiscal responsibility.
Causes and Patterns of Budget Blowouts
Budget blowouts are common, and several factors contribute to these financial overruns:
Inadequate Planning: Poor initial planning often leads to unrealistic budget estimates. Without thorough research and accurate forecasting, projects are set up for failure from the start. Comprehensive feasibility studies and detailed risk assessments are essential components of responsible fiscal planning.
Unexpected Costs: Unforeseen expenses, such as unexpected repairs or changes in market conditions, can quickly derail a budget. For instance, fluctuations in material and labour costs can significantly impact project expenses. The COVID-19 pandemic demonstrated how global supply chain disruptions can dramatically inflate costs across sectors.
Inefficient Management: Lack of proper asset management and preventive maintenance can lead to escalating costs. Proactive strategies are essential to avoid costly surprises. Regular audits, performance reviews, and implementation of best practices can significantly mitigate financial risks.
Erroneous Figures: Sometimes, budget numbers are manipulated to win contracts, leading to unrealistic expectations and inevitable overruns. This "lowball" approach undermines public trust and ultimately costs taxpayers more in the long run. Transparency and accountability are crucial safeguards against such practices.
The Impact on Personal and Business Expenses
The issue of budget blowouts extends beyond public funds. In our daily lives, we face rising costs in various areas:
Insurance Bills: Both personal and business insurance premiums have seen significant increases in recent years, adding to the financial burden on households and enterprises alike. Climate change-related disasters and increasing claim frequencies have contributed to this trend.
Food and Utility Bills: The cost of living continues to rise, with food, power, and fuel bills taking a larger share of our income. Inflationary pressures and resource constraints have accelerated these increases, putting strain on family budgets.
Forced Dependencies: The increasing reliance on services and software to operate physical items like vehicles, tractors, trucks, phones, and computers can create a dependency that limits our choices and increases costs. Subscription models have replaced many one-time purchases, creating ongoing financial commitments.
Strategies for Managing Expenses
To navigate these financial challenges, we must adopt effective strategies for managing both personal and business expenses:
Budgeting: Creating a comprehensive budget that accounts for all income and expenditures is crucial. This helps in tracking spending and identifying areas for cost-cutting. Zero-based budgeting approaches can be particularly effective for both organisations and individuals.
Expense Tracking: Regularly monitoring expenses can help in identifying unnecessary spending and making informed decisions about where to cut costs. Digital tools and apps have made this process more accessible and efficient than ever before.
Preventive Maintenance: Implementing preventive maintenance strategies can reduce unexpected repair costs and improve asset longevity. This applies equally to public infrastructure, business equipment, and personal possessions.
Diversifying Income: Exploring additional income streams can help in meeting rising expenses and improving financial stability. For governments, this might mean broadening the tax base; for individuals, it could involve developing side hustles or passive income sources.
Weathering Financial Storms
All of this preparation is valuable, but sometimes we face a perfect storm of financial challenges. The good work that has been done is not wasted, for it has ensured that we are shipshape and can batten down the hatches to weather these difficult periods and emerge stronger than if we had not prepared. Financial resilience comes from both prudent management during normal times and having contingency plans for extraordinary circumstances.
Conclusion
The proverb "Cut your coat according to your cloth" remains a timeless lesson in fiscal responsibility. Whether managing public funds or personal finances, it is essential to plan carefully, manage resources efficiently, and make informed decisions to avoid financial blowouts. By adopting proactive strategies and staying vigilant, we can navigate the challenges of rising costs and ensure a more stable financial future for ourselves, our organizations, and our society as a whole.
In an era of increasing financial complexity and economic uncertainty, this centuries-old wisdom offers a simple but profound guideline: live within your means and spend wisely, especially when the money belongs to others.
Bruce Jenks is a financial adviser at Stewart Group, a Hawke’s Bay and Wellington-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, wealth management, risk insurance and KiwiSaver scheme solutions. Blog No 6
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
