6.2. Budgets, planning and project management

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Do curso por Moscow Institute of Physics and Technology

Core Concepts of Accounting – Numbers and People

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Moscow Institute of Physics and Technology

Core Concepts of Accounting – Numbers and People

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Curso 3 de 5 em Specialization Understanding Modern Finance

Whenever the word “accounting” is pronounced, it is immediately associated with the need to memorize endless boring numbers. However, it is the common financial statements that contain important information that provides inputs for valuation of investment projects. The only challenge is how to properly extract them. Accounting and finance are indeed intertwined. Sometimes people that are not experienced in the area even mix them up. But most often emphasis in accounting is on numbers. Still, the deep understanding of key accounting concepts helps reveal the interests and actions of people behind these numbers. And the human dimension of accounting adds invaluable insight in the potential of successful project implementation. This Course discusses core ideas and concepts of both financial and managerial accounting. It by no means pretends to be comprehensive to any extent. But, being rather an accounting overview, it focuses on the issues that are most relevant and important for effective valuation of investment projects. The learners will gain insight into the essence of accounting. They will be able to use the obtained knowledge and skills to successfully advance in their career at a financial institution, as well as in the area of financial management at non-financial businesses. To pursue a career in accounting, a more detailed study is strongly recommended.

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Budgets and Responsibility Accounting. Accounting and Valuation – Final Conclusions

Week 6, the final week of the Course, is devoted to the discussion of budgets and responsibility accounting as powerful tools of improving efficiency and quality of managerial decision making. A comprehensive example of preparing the operational budget will help reveal the interdependence of different areas of management in the budgeting process. We will also discuss responsibility accounting in some more detail to follow relationships between decision makers, processes, and results – or, as we call it, numbers and people. We will comment on some major trends in approaching budgeting in the fast changing, uncertain, and complex world. Finally, we summarize the contribution of accounting to the valuation of investment projects. As a result, you will be able to successfully apply the obtained knowledge and skills well beyond accounting, but in any financial and managerial area.

6.1. Budgets – an overview. The budgeting cycle11:23

6.2. Budgets, planning and project management13:20

6.3. The master budget – an idea6:23

6.4. Operational budget – the data (1)13:09

6.5. Operational budget – the data (2)5:22

6.6. Preparing operational budget (1)3:16

6.7. Preparing operational budget (2)6:58

6.8. Preparing operational budget (3)6:40

6.9. Preparing operational budget (final steps)7:44

6.10. Budgeting and responsibility accounting16:57

6.11. Changes in budgeting – major trends8:01

6.12. Accounting and valuation – final conclusions7:13

Conheça os instrutores

Konstantin Kontor
Director and Professor of Finance and Strategy
American Institute of Business and Economics (AIBEc)

Well, in this episode, I will try to concentrate on some areas in budgeting,

and we'll provide some ideas, examples, and why it's so important.

It will build up on the previous discussion but

will be a little bit more narrowed down.

So I will put the budgets,

Planning, And project management.

Again, I am not pretending to be comprehensive here and

to some extent I will be repeating myself.

But that is important because I will say a few words about

why budgets are great or why they may be great.

So here, I'll put that budgets,

Promote, Here, I'll put,

may promote because if this is not done correctly, they may not promote it.

What?

Well, clearly, and again they can promote efficiency

in the following involved actions, first of all, planning.

What does planning efficiently mean?

Back to this example of the bridge, you say, well, the bridge is a mile long and

they're planning to build it in one month and it will cost me $10 million.

Well that kind of planning is clearly stupid and

crazy because you can imagine that this is unrealistic.

You don't have to be a professional in accounting, or

maybe even a child realizes.

That for such a small amount, and for such a short period of time,

you cannot build the bridge.

Even if you've got all the inputs for free, then technological phases,

for example, when the concrete becomes strong,

that requires longer time than this month.

Again, I produce an exaggerated example but

oftentimes, people get bogged down with over-optimistic approaches and

some of their planning is unrealistic.

Again, if you create the budget properly with all these feedbacks,

then you can reveal some of these unrealistic things in planning.

And on top of that, remember we said that in the budgeting process,

you create the reference frame.

And if you start implementing, you'll quickly see that something is going wrong

and that will bring you back to the initial planning.

And that is how you can improve your planning even if you committed a mistake

when you first did it.

Now the next thing which is clearly important here is implementation.

Like I said, if a plan is realistic, if in this budget,

you can see the link between various units,

various people, and some tasks, goals and whatever.

Then it's not the case in which you will have to really fight for

the achievement of your goal.

Instead, if you properly

prepare the budget then the people will be more willing to contribute to that.

I'm not saying that they will do that just because they're great or

because you motivated them in a very special way.

But if it's realistic, if it's supported with and is relevant to

your previous activities, that gives you more chances of successful implementation.

Now, closely linked to that is another human dimension,

this is the idea of performance criteria,

Then evaluation, And motivation.

So we have to see that budgets never, well,

they show some plans but it's never the case

that they are achieved to the last penny.

And here, you can see that what is the good,

what is the okay, and what is the poor results.

So you have to put these,

remember these reference points that we talked about in the previous episode.

And that deals with the idea of evaluation of the people and some kind of motivation.

For example, if the budget was done incorrectly,

it may be the case that some unit or group of people will always be blamed.

But given this budget, they can never achieve their goals because they

have neither resources nor time to complete that successfully.

Again, if the process is done correctly,

then you can follow from some of the feedback loops and

links and then you'll have the chance to correct the situation.

And now from here, we are moving to two other very important areas,

that is coordination, And communication.

Again, it's better seen on the example of a project,

big projects oftentimes involve a lot of people from various divisions.

And unless you have a clear budget that is properly communicated to the people

starting from the very top stakeholders down to the people at the site.

Then unfortunately, you may have this misunderstanding.

The notorious effect of the Tower of Babel shows up here again.

And coordination is just a set of procedures and

rules by which after they have been communicated that.

So you basically say that if there are IT people and there are salespeople,

marketing people have.

To somehow operate together, although that is unrealistic,

on a day-to-day basis is not required but

in order to achieve a certain phase in this project.

Unless they are coordinated, then you can go well off rails

in terms of money or in terms of time or in terms of quality.

So you can see immediately that the budgeting process is the one that,

again focuses on our idea of numbers and people.

Although we talked about the fact that budgets are quantified plans, but

they promote things,

not only these numbers, but in terms of profitability.

But things that are important for [INAUDIBLE] that are other than numbers.

And most of these important goals and

ideas about budgets deal with non-numerical parameters.

And they are still very important for the result of the project and

for the bottomline performance of a company.

And so here I would, as always,

put, I know that maybe you are bored of that, but that's important.

So again, it's numbers, Versus people.

And again, in this area we do not see the fight, actually,

numbers may scare people, they may demotivate them.

And by the same token, if this is all done properly then these numbers

can motivate them and actually contribute to successful performance.

And now, I would like to focus on another

thing that is important budgeting,

and this is strategy versus plans.

So here, again, this is not the strategy course by any means,

I am just pointing this out as an important component.

And the detailed discussion goes well beyond the scope of this course and

this specialization.

But for now, the important thing for me is the following,

let's say that this is the strategy analysis of a company.

And on the basis of that, you have some goals,

then you came up with some long run plans,

That you reformulated into long-run budgets.

Again, we already understand what happens here, so some of these plans may be

non-quantified or non-quantifiable, we did that somehow.

And by the same token, we have the short run,

horizon short run plans, And short run budgets.

And again, it's pretty tempting to put arrows here like this.

And that would not be great at all because the story actually goes like this.

I'll use the blue marker, there is a arrow here and there are arrows here too.

So here, we focus on interrelations.

And therefore, we can see that,

It is in the analysis of these, you can also put feedback,

I know this kind of generic, but anyway.

So again, if we have strategy, so

this is the long-term view and [INAUDIBLE] some big things here.

And then from the stop level that's at the level of top management, we say.

Well, you have to do this, you have to do that,

you have to grow this way, and so on, and so forth.

But the problem is that, again strategy deals with long run view and from that,

we have to keep in mind our short run plans too.

And it is the analysis of this feedback that goes both ways that allows us to

actually focus on budgeting that will be adequate to the overall strategic plans.

Now, that sounds trivial, because why would you

produce budgets that will be not corresponding to your plans?

It's easier said than done, this is really oftentimes wishful thinking stuff.

So you have to immediately and from the very beginning,

you have to incorporate these ideas of feedback loops and

the analysis of that in your budgeting cycle.

Now, this again sounds pretty generic but

it shows to you that, remember we said that the budgets are tools.

The plan unless it's put in a certain form that can be used for all these goals.

Planning, control, feedback, motivation, coordination,

communication, without that your plans are abstract.

So wrapping up the introduction to budgeting,

I am just pointing out that this is a process.

And this process openly involves many stakeholders,

many people with their interests that are not always parallel.

And like I said, this whole idea that we will study by the end of this week,

our responsibility accounting in this course linked to budgets.

This is the way to overcome potential conflicts of interest in the course here.

And contribute to the more successful implementation

of projects and to reach the overall positive bottom line.

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