One of the most important jobs for a project manager is to keep control of the money, as one of the main ways a project is deemed to be successful is whether or not it was delivered within the approved budget.
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 budget 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.
If you’re using the Psoda budget management module, you’ll find the fields to edit the project start date and the number of budget intervals in the popups when you create or edit a project.
This is normally the most difficult part:
- Estimating how much is it going to cost, or
- How you are 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 projected income. In this case, you may enter the anticipated expenses as positive values and the projected income as negative values.
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
- Estimate (forecast) the costs for each line item for each of the months of the budget
- Group similar items together, for example sub-contractors, materials, equipment hire, etc. Think of groupings that may be useful to report on.
- For larger projects you can group the initial groups into larger groups
- 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 (this is done automatically in the Psoda budget management module). 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 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 about that!). 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 right on target with your budget.
If the variance is positive, then you are spending more than your budget and will have to tighten the belt.
Accumulated forecast vs actual
The accumulated forecast simply 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 were $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|
Psoda budget management
The Psoda budget management tool lets you manage budgets for your programmes, projects and sub-projects using the concepts described above. With Psoda you can:
- Define your budget breakdowns into sub-groups and line items with automatic roll-up of forecasts, approved changes and actual expenditure
- Capture actual expenses on the project and map those to budget items.
- Plot accumulated forecast vs actual expenditure
- Include financial details on your project, programme and portfolio dashboards
- Report on project finances
- Roll Project finances up into programmes and/or portfolios
- Report across programmes and portfolios
To try Psoda’s budget management functionality for yourself sign up for a free 30 day trial