Managing money

One of the coalition’s flagship policies has been to give professionals, such as head teachers or doctors more direct control over the funding and running of their respective public services. They thus should have the freedom to decide how individual health care trust budgets (for example) are spent. What could be wrong with that? Well plenty!

Of course the Tories are cutting the NHS budget in real terms (rising population and an ageing society plus inflation means the amount of money to maintain present services is rising much faster than the increases the Tories are putting, so it’s a cut in real terms). So the only “freedom” that doctors (or head teachers) will enjoy is which of their colleagues to sack and what medicinal services they’re going to stop providing. Not quite what the Tory propaganda would have you believe.

But I’m worried about a more fundamental problem that this. The truth is that many professionals aren’t exactly good with handling money. That’s sort of what we have bean counters and accountants for! For example, I remember reading somewhere that banks consider doctors and nurses to be a mild credit risk compared to other professions (something to do with the ability to proscribe themselves drugs and the keys the medical cabinet) and usually tweak their mortgage rates up a notch or two to compensate.

I used to work for a building services company and it gave me quite a bit of insight into many different professions. There were for example, one or two chef’s (our area’s “celebrity” chef types) who were forever calling us in to do work for them. They would spend a fortune on renovating a property (often ignoring our engineering advice about how expensive and time consuming it would be) then change their mind and ask for us to renovate again, e.g.

“See that pillar” “you mean the one that since you wanted everything open plan is now holding up the roof and the 3 stories above us” “yes, it’s in the way, can you move it a few feet to the left” “do you have any idea how much that will cost?” “No, and can you get it done by Thursday, I’ve a wedding booked”

Inevitably these guys would run a cracking restaurant, brilliant food, rave reviews, only for him to go bust after a year or two as he’d either overspend on renovations and repairs, or he simply hadn’t priced his food appropriately (and hence was losing money on every dish served) or set the prices too high and didn’t get enough bums on seats. A couple months later, he’s back up and running with a new restaurant and new backers….

And lest anyone accuse me of picking on chef’s (or doctors!) I’d say their about average compared to other professions. One of the reasons banks are so reluctant to lend money to small businesses these days is that they realise that a very high proportion of business ventures tend to fail, often within their first year of operation. Such failures are often for fairly simple reasons (a good infographic from the US on this here)…such as forgetting to pay their taxes!

And that’s in good economic circumstances. In a recession with a budget axe wielding manic in number 11 Downing street, the banks know that the vast majority of businesses they loan money too will get into financial difficulty in some form or another.

And am I suggesting than engineers like me are any better? Far from it, we’re the sort who’d buy magic beans off strangers in the street! I often find that the most successful engineering firms are those run by engineers, and thus people who understand how things work and prioritise good engineering (I’m thinking of a number of German firms) over gimmicky marketing fads (that would be the Italian car companies!). However crucially those successful firms will have some bean counter on the board of directors whose job is essentially to hold onto the companies purse strings and stop us dopey engineers spending it recklessly.

By contrast without someone in the loop to control spending, engineers left to their own devices will often spend millions on financially impractical products. Probably the best example I can think of is Concorde, a technical success as an aircraft yes, but a commercial failure. Or there’s the old joke (entirely true I might add) where NASA in support of the Apollo program spent millions developing a pen that would work in zero gravity….the Russians just used pencils!

Winter is coming
And in my sector, higher education, we’ve seen this all too familiar pattern repeated. You would think the response of Vice Chancellors to tuition fees would be to take the money and save it up for a rainy day. However, when labour introduced fees instead they took the money and ran and went on a massive spending spree and campus building boom, some of these overseas. As one associate Dean put it to me his VC was “spending money like a sailor on shore leave”. Some uni’s have been entering into education partnerships with entrepreneur’s to fund new education initiatives (often focusing on private tuition for companies or bringing in foreign students onto specialised courses) on a commercial basis.

When the coalition naively put up fees, they probably thought that only a handful of the Russell group uni’s would whack it up to the maximum of £9,000. Instead, practically every uni in the country put them up to that level or not far off it (I understand the average fee is around about £8,500). Did the uni’s take this money and save it in anticipation of the inevitable drop in student numbers? No they went on another spending spree! And like my friend the chef, I’m seeing many of the same mistakes and schoolboy errors you see in the small business sector being repeated across the HEI sector…only on a much larger scale!

For some time it’s been predicted that fees would produce a drop in student numbers (something not helped by the Tories clamping down on overseas students with their immigration targets).

In the last few months many universities in the UK are starting to feel the pinch, staff are being laid off, and we’re not talking about the liberal arts department but even well-funded departments with a good reputation and high student numbers (such as engineering departments) are being forced to make cut backs. It is for good reason that I’m predicting it a mere matter of time before a major university in the UK goes bankrupt.

And the government’s so-called “free schools” and “academies” shows all the signs that these same policy mistakes are being repeated. With the heads embarking on a heavy and expensive school building and renovations program, or like the uni’s, engaging in private ventures. Now for sure, many of the UK’s schools are badly in need of renovation. But as they guy’s on Dragon’s Den would say, can you afford it? Who is going to pay for that and how do you intend to finance this?

One of the problems which I don’t think University VC’s or schools heads understand is that some of the things they are doing are extremely risky from a financial point of view. If a business deal goes badly wrong it is easily possible to lose many times more than the capital you initially invested (once you factor in maintenance costs, close out costs, staffing costs, redundancy payments, legal fees, fines, etc.). Consequently I don’t think many realise the scale of the hit they are likely to take if the deals they are striking go rotten, which they almost certainly will if student numbers take a hit.

Similarly an expensive building tends to be expensive to maintain. We just moved in this year to such a place and suffice to say one academic year has knocked the stuffing out of the building, many things no longer work and need repair. Again those are fixed costs that will sit like millstone around the VC’s neck for sometime to come.

If you can’t afford it, don’t buy it

The truth is that we all may grumble and whine about it, but we do need people who are prudent with money holding the purse strings. And while we might complain about “big government” with dictates and spending plans coming out of head office in London, but it’s for good reason. As the truth is that successive governments have relied on this approach because it works. The finances of the NHS are best handled by people who understand how money works and how to spend it wisely, doctors are the worst people to put in charge! Equally universities should have their budgets much more tightly controlled, both by the beancounters in accounting but also by government.

While yes I see some room to distribute spending decisions to a more local level, and thus cut red tape, but only under careful control and auditing of some form. And ultimately in a democracy it should be the people (be they via local politics or national politics) who decide how public money is spent, not government mandarins, doctors or politicians (their job is to implement the public’s wishes).

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4 thoughts on “Managing money

  1. Excellent post. It’s true that an expert – such as a doctor – is less likely to also be a money expert than someone whose primary skill is as a money expert. This plan also, surely, means that such a doctor must spend less time on doctoring.

    And as for universities: they can expect to see fewer applicants from poorer familes applying over the coming years. This is a bad thing on principle as it will tend to reinforce class barriers rather than help remove them. But, it may not be a bad thing if some Unis close. There are now many people doing degrees who would be better served doing something else. 9% did degrees in 1980, it’s now 45%.

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    • I tend to agree, university education isn’t for everybody, some people are better getting a degree in “the university of life” than in a university. I know people who went off and became welders and mechanics who are probably earning as much as me now!

      And certainly I think university education should be open too all. Indeed one of the problems with the fees system is that we have a couple of students who seem to think that just because they are paying £9k they are somehow entitled to a degree without having to do any hard work.

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      • That sense of entitlement to a degree is swinging things very strongly in favour of the students. It’s getting to the point now where they daren’t fail too many students.

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      • While I tend to take the view that standards need to be upheld, as that’s only fair on those students who put in the work, I reckon some lecturers are letting standards slip for the sake of a quiet life.

        I won’t want to point the finger at any particular uni, but overall, based on the fact I’ve taught in Ireland (where we don’t have fees) and the UK, I’d say the standards have dropped in the UK as a result of fees.

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