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.
