Project budgeting is crucial in order to keep the project funded as well as keeping it controlled. In order to prepare the project’s budget, what one should need to do is simply sum up the estimated costs of the individual activities.
This information is needed to create a cost baseline and determine what funding requirements are.
Project budgets are similar to resource plans, which are a reflection of project work and the timing this is required to complete that work.
This provides the company’s management with an understanding of how funds will be utilized and expended over a period of time for the project’s implementation.
It is part of a financial process that can be divided into three levels:
- cost estimation: it is established by relating to the actual costs of similar projects executed in the past and if possible, it is linked to the estimated timeframe,
- project budgeting: budget is allocated in accordance with the breakdown of the project.
- cost controlling.
A calculation method that is widely used in project management is Earned Value Management or the S-curve. It is used to measure the progress of a project and to foresee the next steps by comparing forecasts with actions that are being carried out and the costs associated with it.
A project budget consists of listing, identification, and classification of expenses and the revenue a company has or is in the process of being acquired.
Once project budget is prepared and finalized then major responsibility of managing a project falls on the project manager. Before initiating the process of budgeting for the project, following are some points which he must keep in his mind;
- He must assess the feasibility of the project which includes the market study and an estimate of the budget and resources available.
- He should set objectives.
- He should breakdown the projects and schedule tasks.
- He must allocate resources (human and material).
- He must identify risk factors,
- He must plan projects and schedules,
- He must create quotations and allocate the project budget.
- After doing all the above steps, he should present it to higher management for validation and approval, and make amendments (if necessary).
- Once the project budget is finalized, he should then monitor the progress of the project and adjust schedules and budgets in real-time where he thinks necessary.
1st Quarterly Budget for XYZ Project
For the period ended Dec 31, 20XX
|Income||Budgeted||Actual||Excess / (Deficit)|
|————– (Amount In million dollars) —————|
|Profit on bank deposits||0.1||0.2||0.1|
|Gain on disposal||0.4||2||1.6|
|Expenditure||Budgeted||Actual||Excess / (Deficit)|
|————– (Amount In million dollars) —————|
|Salaries and wages||1||1.5||0.5|
|Repair and Maintenance expenses||0.1||0.2||0.1|
|Staff capacity development||0.6||0.2||(0.4)|
|Printing and Stationery||0.04||0.08||0.04|
The project manager of ABC company was assigned the task of preparing a project budget of the 1st quarter for the period ended Dec 31, 20XX.
In the first column, he mentioned all the sources from which he had expected income would arise in the given quarter period against which he also calculated the budgeted expenditure.
At the end of the 1st quarter, he calculated the actual income earned (which also includes grants and donations received) and the expenditure incurred.
During the analysis it was observed that in a few heads of income there was an excess of actual income received as compared to the budgeted amount however in a few heads, the income received was less than expected.
Similar trend was also observed during the analysis of expenditure.
If the overall impact of income and expenditure is observed, it can be easily noticed that the actual total income received was less than budgeted. Overall actual expenses also exceeded the budgeted limit set for the expenditure of this project.
From the above example, the performance of the project manager can also be judged. It can be observed that the manager was failed to manage the project appropriately since he remained unable to control the expenses against the available resources.
The project manager is required to deeply analyze the 1st quarter performance before making the project budget for the 2nd quarter.
He needs to control unneeded expenses in the next quarter and should spend the available project resources on project activities in order to achieve the objectives of the project which will subsequently lead towards the success of the company.
Repeatedly poor performance in the projects will expose the company at the risk of non-achievement of the objectives which would harm the reputation of the company in the future and the results would be in the form of inability to receive the grants and donations.
It is very important to give necessary and considerable time and attention when developing the budget of a project. It requires to take into account several factors, including time, financial resources, objectives and human resources.
Preparation of project budget is significant due to the following reasons:
- It is helpful in the process of decision-making.
- It anticipates future outcomes.
- It confronts stakeholder’s desires with economic realities.
- It is useful in the application for funding, donations, or partnerships.
- It is useful as it presents a credible and viable project.
- It is also useful for project cost control. Comparing the project’s actual cost against the approved budget helps the project manager of a company to determine if the project is either progressing according to the plan or not. If not, then which type of corrective actions are needed to take in order to ensure the smooth flow of project activities.
- And finally, it helps him to adjust the project as needed.