Most programmes and projects are subject to the Triple Constraints of budget, schedule and scope. It is the first of these constraints that we are discussing today.
For your programme or project to be successful is has to stay within the approved budget. The approved budget can be either the original baseline budget or it can include approved changes.
Even if the budget is only loosely constrained you want to track the actual expenditure for reporting purposes.
This article describes some of the basic principles of budget management including forecasting, baselines, approved changes, actual expenditure and variance.
The first step in defining your budget is to look at the project milestones and decide on the budget start date. If you don’t know the start date yet you can work with generic Month 1, Month 2, Month 3, etc and set the start date later on.
Your start date may be before the official start date of the project, especially if you are going to incur expenses before the official start date. This is almost always the case :).
Next you have to decide how many intervals (or months) you need to budget for. You can use the project end date as a guide and calculate the number of months between the start date you selected and the project end date.
In Psoda you can configure the start date and the number of budget intervals for your programme or project.
This is normally the most difficult part:
- estimating how much is it going to cost, or
- how am I going to fit everything into the limited budget?
If you don’t have a specific budget figure and need to work out approximately how much your project is going to cost then you would normally use the Bottom-up approach.
If you have a fixed budget and you need to work out how you are going to fit everything then you would normally use the Top-down approach.
In practice though you will probably use a combination of these two approaches.
Remember that budgets can include both anticipated expenses as well as expected income.
As the name suggests this approach starts at the bottom:
- List all of the costs and income, i.e. budget line items, that you can think of
- Group similar items together, for example sub-contractors, materials, equipment hire, etc. Think of groups that may be useful to report on.
- For larger projects you can group these initial groups into larger groups
- Estimate (forecast) the costs for each line item for each of the months of the budget
- The line item forecasts can be added up into the sub-groups and groups of the budget. (This is done automatically in the Psoda budget management module.)
- Check that the budget totals do not exceed the budget expectations
This approach starts at the top with the overall budget allowance:
- Break the budget down into large groups, e.g. Hardware, Licenses, Manpower, etc.; and allocate a portion of the overall budget to each group
- For larger projects break each group down into smaller sub-groups
- Break each group or sub-group into a number of budget line items
- Estimate (forecast) the costs or income for each line item for each of the months of the project
- Add the items up to get totals for the sub-groups or groups. Check that these totals do not exceed the budget for the group or sub-group.
Once the budget forecast has been accepted and signed off by all the project (or programme) stakeholders you want to baseline the budget. Hereafter only approved changes will be allowed on the budget (see below).
The project baseline figures should not be changed again later on in the project. If there are changes to the project you have to get additional sign-off for the changes to the budget. These approved changes should be tracked separately.
As soon as you start incurring costs on your project you want to record these expenses so that you can track your actual expenditure against the original budget forecast.
Match (or map) each expense item against a budget line item.
If you cannot find a suitable match for the expense item then you may have missed something in your original forecasts and will have to add a new budget line item. Because this is a change to the baseline budget you will have to get approval from the project (or programme) stakeholders.
Add up the expenses for each month against the budget line items they are mapped to. This will show you the actual expenditure for that budget item over time vs. the forecast budget.
In Psoda the expenses are automatically added together across the months for the mapped budget items.
Variance is the difference between the approved budget and the actual expenditure. It provides a single number to tell if you are spending more or less than what you had planned for.
To clearly understand variance we need to do a bit of maths (sorry). If we define the following variables:
- F – Forecast
- C – Approved changes
- A – Actual expenditure
Then the variance (V) is calculated as:
V = A – (F + C)
If the variance is negative then you are spending less than your budget – This is a good thing!
If the variance is zero then you are on right on target with your budget.
If the variance is positive then you are spending more than your budget and you’ll have to tighten the belt.
Accumulated forecast vs actual
The accumulated forecast basically means the sum of all the forecasts up to the date under review. So if the budget had been $10 000 for each month of the project then the accumulated forecast will be $10 000 in the first month, $20 000 in the second, $30 000 in the third month and so on.
Similarly the accumulated actual expenditure is a sum of all the expenditure up to the date under review. For example if the expenditure for the first three months of a project had been $12 000, $10 000 and $8 000 then the accumulated expenditure would be $12 000 for the first month, $22 000 for the second month and $30 000 for the third month.
By comparing the accumulated budget forecast and the accumulated actual expenditure you can see if your project is burning cash faster than it should. The table below summarises the examples from above:
|Month||Forecast||Accumulated forecast||Actual||Accumulated actual|
|1||10 000||10 000||12 000||12 000|
|2||10 000||20 000||10 000||22 000|
|3||10 000||30 000||8 000||30 000|
The following images shows a chart of the accumulated forecast vs the actual expenditure on a project:
In the initial stages of the project the actual expenditure was higher than the forecast value (the red line is above the green line). The project manager then pulled in the belt and for most of the project the expenditure was well below the original forecast (the red line is well below the green line).
Psoda budget management
The Psoda budget management module allows you manage budgets for your programmes, projects and sub-projects using the concepts described above:
- You can define your budget breakdowns into sub-groups and line items with automatic roll-up of forecasts, approved changes and actual expenditure
- You can capture actual expenses on the project and map those to budget items.
- You can report on per vendor expenses
- Plot accumulated forecast vs actual expenditure