Budgeting for the future

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The usual form of this column, every April for the past 10 years, has been to peer behind the ’smoke and mirrors’ of Chancellor Brown’s annual Budget speeches and prise out some of the nuggets. Well this time it seems pointless as we’ll have several years to analyse this budget. You see, this year the Chancellor has really gone into the futurology business. He hasn’t simply delayed a few measures (such as the ’fuel duty escalator’) until later this year; he’s actually laid down a series of fiscal measures which are intended to take effect at various times between now and 2010.

Obviously there’s a political impact here. Assuming that Gordon Brown will leave the Treasury to take over at Number 10 within the next few months, he’s certainly put his successor at the Treasury in an odd position. Imagine coming into a new job and finding that your predecessor has already told the world that you’ll have to stick to the script that he’s put in tablets of stone! But if a week is a long time in politics, three years is an eternity when it comes to financial planning.

We’re frequently asked to prepare business plans for clients. In some cases they’re long-established traders who are looking to expand, or just need to renew their loan facilities. Either way their potential lenders will expect to see a properly thought-out business plan. Sometimes the request is from a new entrant into a retail business - a start-up, where someone is trying to find out how much they’ll need to borrow and what sort of return they should be able to achieve. Our standard approach is to prepare a 12-month business plan, which includes projections of cashflow and profitability, together with a projected balance sheet for the end of their first year. Occasionally we’re asked to prepare a business plan for two, three or even five years. The ostensible reason being that if the bank is providing a fixed-term loan for that period, the retailer should be able to plan for the whole term of the loan. Our usual response is that yes, it might be possible, but that it would not be worth the paper it was printed on.

No, not because we like turning work away, it’s just that any business plan is based on a lot of assumptions. The more assumptions, and the longer the period that you try and project them forwards, the more likely your plan is to go completely off course.

Take petrol retailing. Your business plan will include assumptions about fuel volumes and the pump price of fuel - usually down to the decimal point per litre. Does anyone really believe they know what the pump price will be month-by-month over the rest of this year, let alone in 12 or 24 months time? The global poker game that is international politics only needs one player to make an unexpected move (George Dubya to launch a missile at Iran?) and the price of fuel at the pumps will go stratospheric, while the availability may be rather restricted. Or if that’s too dramatic for your taste, how about a spot of contaminated fuel? Did anyone at Tesco or Morrison’s start their planning for 2007 with a built-in factor for bad publicity and closed forecourts, quite apart from the compensation costs that will probably run into the millions before that episode is closed? Not likely.

Or look at ordinary operating costs. Your business plan will have to include assumptions about pay rates. Knowing the National Minimum Wage (NMW) rate for October 2007 is one thing, trying to predict it for October 2008 or 2009 is quite another. And the NMW may not be what drives the cost of labour in your local area. Think of the effect of potential competitors opening up and offering your staff a large pay hike to go filling shelves down the road.

What we’re saying here is that we all have very limited access to information from the future. We can make certain predictions based on past events, but in general they are only expected to hold good for the short term. Trying to predict revenues and costs in a volatile economic environment, beyond about 12 months, involves more crystal-ball gazing than science. Which brings us back to Gordon Brown. Perhaps he’s in a fortunate position where he will be able to airbrush any mistaken assumptions made in the 2007 Budget out of history and hope that nobody notices? Or perhaps he has access to information denied to mere mortals? If so, can we please borrow one of his crystal balls - preferably in time for the next double rollover on the Lottery.

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=== ’All Sites’ average Mar 05 Mar 04 rise/fall (%) ===

Monthly Fuel Volume Sold (Litres) 409,588 393,393 4.1%

Wetstock (Loss) (%) (0.25%) (0.06%) 319.6%

Monthly Shop Sales (£) £54,005 £49,288 9.6%

Sales Ratio (£p/KL) £131.85 £125.29 5.2%

Monthly Shop GP (£) £10,824 £9,733 11.2%

Monthly Shop GP (%) 20.0% 19.7% 1.5%

Cash (Short) (£) £ (86) £ (95) (9.9%)

Closing Stock (£) £21,257 £19,368 9.8%

Stock Turn (times p.a.) 24.0 24.0 0.2%

Monthly Wage Cost (£) £7,150 £5,853 22.2%