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Is My Operating Budget a Fairy Tale?
"Someone is sitting in the shade today because somebody planted a tree a long time ago" - Warren Buffett.
There are several interesting money management lessons we can learn from Fairy Tales.
Once upon a time...
- Robin Hood, a heroic outlaw (with a fondness for green outfits), used the cunning of disguise to steal from the rich in order to give to the poor.
- Bearskin, a man who was offered a lot of money by a cloven-hooved stranger to perform some disgusting things, managed to endure the challenge and, as a result, receive money from the devil.
- Ebenezer Scrooge, an old miser who hated Christmas and hoarded money, repented and became a model of generosity.
- The Star Money, an orphaned girl who gave the clothes off her back to another poor girl, was rewarded by the stars who dropped silver coins and wove her a new shirt of the finest linen.
- Jack, a naive young boy who irresponsibly traded a cow for magic beans, became rich overnight when he climbed to the top of a beanstalk and stole gold coins from a sleeping giant.
Money management in the real world is just as outlandish as what goes in fairy tales. In fact, I have seen some darn strange stuff going on. I would argue that operating budgets can sometimes be fiendishly deceptive with the entertainment value of a fairy tale.
Every business, every organization, every household has an operating budget — we use them to help us run our lives. To help us distinguish fact from fiction, it may be helpful to look at these operating budgets through three lenses:
- “Catch-up” costs (looking backwards)
- “Keep-up” costs (looking forwards)
- “Get-ahead” costs (looking upwards and sideways)
These lenses correspond to three types of investment categories that dissect budgets and help us evaluate whether it is grounded in reality or whether it is just another fairy tale.
1. “Catch-Up” Costs
This category refers to the accumulated backlog of deferred maintenance associated with any asset (a building, a car, or even ourselves) and usually arises as a result of previous years budgets having been fairy tales. Here is a snippet of some of the many catch-up costs as they appear in the real world:
A Fairy Tale? – A good operating budget recognizes what has not yet been done and provides funds to catch-up for lost time. If it ignores the past then it distorts reality like a fairy tale. Additional information on how to understand catch-up costs relating to buildings can be found in the blog post entitled: What’s hiding in my building?
2. “Keep-Up” Costs
This category includes costs to preserve an asset to ensure that it can reach its useful service life or extend that service life somehow. This includes maintenance to preserve the asset until it has to eventually be replaced. Examples of keep-up costs include:
A Fairy Tale? – An operating budget is a fairy tale if it fails to provide sufficient funds to maintain the asset or doesn’t make adequate preparation for future renewal projects. For buildings, information to help ground a budget in reality can be found in the blog entitled What are the most expensive assets?
3. “Get-Ahead” Costs
These are costs associated with the adaptation and/or upgrade of an asset to avoid early obsolescence. The five principle types of obsolescence include economic (eg. energy efficiency), functional (eg. changes in use), legal (eg. new codes and standards) and style/aesthetic (eg. dated appearance). Here are some examples:
A Fairy Tale? – Operating budgets may or may not include money to upgrade assets. A budget becomes just a fairy tale if it wastes money on unnecessary upgrades while there may be other, more pressing catch-up items requiring attention first. For buildings, deeper insight into get-ahead costs can be found in the blog entitled: Are my assets fading or degrading?
Pulling it Together on the Balance Sheet
Unlike the protagonists in fairy tales who climb beanstalks to gather money from a sleeping giant, or who wait for money to rain down on them, we in the real world need to balance our books. We need to be aware of how the mindful balancing of catch-up, keep-up and get-ahead costs can result in gold coins in our pockets.
And then we can all live happily ever after…
Is there a fourth group of costs that do not fall into either the catch-up, keep-up or get-ahead categories?
David is a certified professional reserve analyst, and a specialist in building maintenance and planning.