 In this presentation we will discuss budget problems or potential pitfalls within the budgeting process that we want to be aware of that we want to avoid. One problem with the budget is that there is an inherent incentive within the budgeting process often to try to understate the sales that will be budgeted for and overstate the expenses. Why? Because that will make it easier to hit the target. So if you're imagining the budget budgeting process as the management, the upper management is there to of course approve the budgeting process, communicate the process of making the budget and then we've got the managing department managers of each department and supervisors of each section of the company then coming up with the budgets for their particular department, their particular segment of the company. Those department managers have an incentive you would think to do things like understate the sales and overstate the expenses because if they do so on the budget then it'll be easier to hit that target and they'll look good to hit the target. In other words if they overstate the sales that they're going to make in their department and understate the expenses which is that's what we would want. We would want sales to be high, we would want the expenses to be low then it'll be harder to hit that and if they don't hit the target then they look bad. If they set a low target that's easy to hit low sales and high expenses then higher lower sales and higher expenses then they know they can achieve then it'll be easier to hit the target and when they hit the target it will look better. So that's just an inherent problem within the budgeting process and we have to be aware of it and we have to be aware of the fact that we want to make sure that we have motivated departments to basically set a budget that has a target that is not too high but achievable and we want to be able to incentivize management to set the target in a place that's reasonable so that they have the incentives so that they can inspire their department to shoot for a reasonable target rather than undershooting it and we have to basically make that part of the culture of the organization to say hey we're going to reward you more, we're looking for management that's looking to make a reasonable type of budget, we'd rather have someone make a budget that's a little too high and miss it than make a budget that's going to be too low just so that they can hit it. Another problem inherent in the budgeting process is that we typically want to set those budgeting goals in such a fashion that there's going to be a challenging growth pattern in it. So typically when we consider the budget we're considering a smooth growth trend that's what we like to see within the sales. We want to see the sales, we want to see the net sales going up in a nice smooth pattern. Another problem inherent to the budgeting process is that pressure could lead people to unethical behavior. In other words we want to set the budget to a point that's going to be difficult for people to meet but still meetable and we often want to see some kind of trend that's going to be a normal kind of uptrend in process. We want to see improvement over time, continuous improvement over time and if there's going to be compensation objectives related to that such as bonuses for hitting a certain objective for hitting a certain mark that can also add to a lot of pressure to make that mark. So as we set those high goals because we need those high goals for maximum performance we also need to be aware that people could be incentivized for unethical behavior and again it's got to be in the culture of the organization to be set that hey we would rather have someone miss the goal even though we set these goals and we want people to strive for them rather than do some unethical type of behavior in order to achieve the goal and possibly doing things that could be fraudulent or deceiving the reports or things that are going to sacrifice the long-term vision of the company in order to meet a short-term goal. What we don't want to have is have the long-term vision the five year, the 10 year being actually diminished or reduced or making it harder to reach because people are doing things that are going to manipulate or harm that long-term vision in order to meet the short-term goal simply because there's pressure of that short-term goal. We want to keep the long-term vision in view inside and make sure that the culture of the organization sees that everything should line up with that long-term vision even though we're shooting at these short-term goals. Another problem inherent in the budget and we touched on this in the first item is that the budget could lead to spending an amount that's going to be equal to the expenses that are allocated to that department. In other words if we are budgeted or allocated some amount of expenses that we can spend in a particular department then we're having an incentive to make sure that we spend everything that's allocated to our department because if we're not it's very likely that we will not be allocated that much in the future so in other words you might see spending that doesn't need to happen we might say hmm we need another plancher here we might need some more chairs here this often happens at the end of the time period at the end of