In brief, a budget is a way of ensuring that your outgoings don’t exceed your incomings. Overspending can lead to the collapse of your project and leave you in debt.
Whether it’s an exhibition, event, performance or concert you’re planning, a well-thought-out budget will help to keep you in the black. Think about your project from start to finish. What will you need to make it a reality? Do you need to employ anyone?
What services and equipment will you have to purchase or hire? Do you need a venue?
Project budget is one of the key success factors for projects—completing the project within budget. Yet, for many project managers, especially those managing internal projects, it’s the success factor they have the least awareness about. There are several reasons why this occurs, and it does vary by industry, but most of the reasons have to do with organizational management structures and organizational budgeting and cost controlling policies. For our purposes, in this age of increased accountability of project investment decisions, we will assume you need to establish a project budget and will need to track costs against it as the project is executed.
If the project or organisation relies on outside funding, budgeting is essential. A funding proposal will require a planned budget, and most donors want to see regular monitoring reports.
Budgets are used to:
• Plan and implement our objectives
• Calculate estimated income and expenditure
• Maximise donor funding
• Co-ordinate activities
• Communicate plans
• Set clear targets
• Quantify the resources and people needed to achieve them
• Monitor, review and evaluate actual performance
• Be accountable to partners, beneficiaries and donors
Who is responsible for a budget?
Managers and staff responsible for the activity should prepare and monitor budgets and see detailed transactions. Finance staff are a technical resource, who often provide information and make sure that the process is
completed professionally. Trustees should monitor a summarised version of the budget and ask questions about the big picture.
The actual process of developing a project budget is straightforward. Start by creating an itemised list of everything you need. The general challenges lie more with omissions and the foundation the budget is based upon. In this section, we will review the details of the development budget and finalize budget steps that we have depicted in our general project planning process flow. Develop your bottom-up budget estimate as follows:
1. Consider each lowest-level activity.
2. Determine direct labor costs for each activity by multiplying the number of hours each person will work on the activity by the person’s hourly salary.
You can estimate direct labor costs by one of the following methods:
• Using the salary of each person on the project
• Using the average salary for people with a particular job title or in a certain department, and so on
Suppose you need a graphic artist to design overheads for your presentation. The head of the graphics department estimates the person will spend 100 hours on your project. If you know Harry (with a salary rate of $30 per hour) will work on the activity, you can estimate your direct labor costs to be $3,000. However, if the director doesn’t know who’ll work on your project, then use the average salary of a graphic artist in your organization to estimate the direct labor costs.
3. Estimate the direct costs for materials, equipment, travel, contractual services, and other resources for each activity. Consult with your procurement department, administrative staff, and finance department to determine the costs of these resources.
4. Determine the indirect costs associated with each activity. You typically estimate indirect costs as a fraction of the planned directlabor costs for the activity. In general, your organization’s finance department determines this fraction annually by the following method:
• Estimating organization direct labor costs for the coming year.
• Estimating organization indirect costs for the coming year.
• Dividing the estimated indirect costs by the estimated direct labor costs.
Choose your method of estimating indirect costs by weighing the potential accuracy of the estimate against the effort to develop it.
The first step in building a project budget is to identify your costs. This sounds easy enough, right? Let’s review the cost sources that need to be considered. These cost sources are summarized in:
■ Labor costs—One of the key budget cost items. Budget should reflect a line item for each person or role—whichever makes the most sense for your project. Costs are based on resource rates and estimated work durations. When dealing with external labor, these costs are a key component of the business relationship and normally easy to obtain. However, it can be difficult getting rates for internal resources. In most organizations, either the human resources or finance department should have standard labor rates for internal resources based on role.
■ Equipment—This category generally includes the tools that the project team requires to complete the work of the project. For budget purposes, the keys with the equipment category are twofold:
• Completeness — Using a bottom-up estimating approach should identify all equipment needs from a task perspective. For knowledge-based projects, you need to account for software-based tools too.
• Expense versus capital — You should work with accounting to determine whether your equipment costs need to be expensed at full cost against your project or whether your project just needs to reflect depreciation cost. Different factors can influence this decision, but the most common one is whether or not the equipment will be used by more than one project.
■ Materials—This category includes those items that are needed to build the product. The information is generally found in the product specifications document. In dealing with vendor relationships, you would either acquire or confirm material costs by reviewing vendor responses to the formal procurement documents.
■ Licenses and Fees — This category includes costs such as software licenses, building permits, and so on.
■ Training — This category includes the cost of any training your project team will need to do their work and any training your users may need to use the final product.
■ Travel—This category includes the travel and lodging costs to be charged to the project that will be incurred by any project team member while doing the work of the project.
■ Operational costs — This category includes the costs associated with the maintenance and support of the final product. In addition, there may be costs to dispose of whatever the project is replacing.
■ Disposal costs — This category includes the costs associated with the disposal or removal of whatever the project is replacing.
■ Overhead costs — This category includes the common overhead costs incurred by any project. Items typically included are facilities, administrative assistance, security, and technology infrastructure. Depending on the organization, these costs may not be allocated to individual projects or there may be a pre-determined percentage or amount that is used by all projects.
■ Costs of “change” — A focal point of project planning is to consider the “change” impact that the project will have. This category would include any costs (change management programs, initial productivity loss) that can directly attribute to the change factor. These costs should have been considered during the project selection phase as part of a cost-benefit analysis or return on investment analysis. In addition, these costs may be accounted for in the other budget categories. The important thing here is to think about these costs up-front during planning.
Monitoring a budget
After approval, and before the period starts, tell everyone who needs to know the budgeted figures. If funded by an outside donor, make sure you will be able to report in their format. If you have several donors, consider producing a ‘donor funding grid’, a convenient way of maximising and managing donor funding. After you start receiving and spending money to implement your programme, it is essential to monitor regularly how close the actual income and expenditure is to the budget.
The stages are:
1. Prepare or receive the information comparing the budget with ‘actual’. A comparison of the budget to ‘actual’ income and expenditure is normally prepared monthly or quarterly. It is sometimes called a ‘budget and actual’ statement (see Figure 1), ‘management accounts’, ‘budget report’ or ‘variance report’.
2. Monitor and review the ‘budget and actual’ statement. Those responsible should identify any difference between each budget and actual income and expenditure item – ‘the variance’ – and be able to explain the reason(s) for this. Add notes to the statement to show why there are differences. Notes are helpful when working with partners at a distance.
Preparing a cash flow forecast
A budget tells you if the money coming in covers the money going out. It does not tell you if you will have enough money at a particular time. However we can see that because one of the grants has not arrived on time, and medical supplies have been bought in advance, we may be temporarily short of money.
A cash flow forecast will show:
• When the money will be received and paid
• Whether there will be a positive or negative bank/cash balance over each month of the period
• If you need to plan to cover a shortfall, or invest a surplus
To compile a cash flow forecast you need to:
1. Use the organisation’s budget
2. Decide when each budget item will be received or paid. Some may be received in a single amount (for example a grant), others may be paid equally each month (for example salaries)
3. Write down each item, as shown in Figure 2. Enter each item when you expect it will be received or paid, regardless of when it is due
4. Include the expected bank and cash balance at the beginning of the period as your starting point
5. Calculate the amount for each month by taking:
• The opening balance for the month
• Plus the money estimated to come in during the month
• Less the money estimated to go out during the monthJohn Cammack Bond
• This equals the balance left at the end of the month (and the opening balance for the next month)
6. Improve your cash flow by considering whether any ‘money coming in’ can be received earlier, or any ‘money going out’ can be paid later
7. Update the forecast as new information becomes available