Banking

Check these four items before analyzing your budget numbers

If you don't recognize and understand these four budget items it's possible (even likely) that you won't properly understand your budget status and you may make wrong decisions based on misunderstanding.

The sponsor of your project has agreed to pay a certain amount of money for a certain solution. If that solution ends up costing more than anticipated, the solution may or may not be viable from a business perspective. That's why you need to manage the schedule and costs on your project.

Managing a budget is vastly different from company to company. In my experience of teaching and consulting in organizations around the world, many organizations (perhaps most) treat the budget as an abstract concept since they use internal resources for projects and don't have the accounting systems to track and report costs allocated to a specific project.

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Let's assume that you work in an organization where you're held accountable for delivering within the project budget and you have the accounting information you need. You want to be in a position to know very quickly if you're trending over your budget. Before you can do the proper budget analysis you have to factor in a number of items.

  • Monthly spending. You rarely spend money at a constant rate. You can't just take a 12-month project budget and divide it into 12 equal installments. You need to first understand what you expected to spend during each month, as well as what you actually spent. This information is vital for making sure that you can make the proper budget analysis.
  • Reporting lag. In most companies, updated financial information is only available monthly and with an additional reporting lag. For instance, you might not know the financial status of your project for the current month until the second week of the following month when the budget reports are released. Some of the spending information may be up to six weeks old by that time. You should keep track of your large expenditures on a weekly basis to make sure there are no large surprises when you receive the budget reports.
  • Expense timing. You need to know when your company recognizes expenses. Your company might recognize an expenses when you receive an invoice, or perhaps not until you pay an invoice, which may be much later. If your company uses purchase orders, your project may get hit with a project charge when the purchase order is generated, even if the actual invoice is not paid for weeks. This may cause expenses to hit early and may make it appear that you are trending overbudget, when really you're not. The expenses are just hitting your budget earlier than you had planned.
  • Misallocations. It's common that expenses can get misallocated from one project to another. One of your first activities after you receive the latest budget numbers is to ensure that the details are correct. This requires the project manager (or a designee) to review each line item. You could have great accounting software, but if someone enters an incorrect project code, you may get charged for the expenses from someone else’s project. If the project manager finds a potential problem, the matter can be brought to the attention of an accounting resource for correction. Of course, there are times when your project expenses may end up on someone else’s project as well. You need to recognize this. Otherwise, you may get hit for an "unexpected" expense months later when the other project manager catches the error.

As a project manager, you must understand these four budget items. If you don't recognize and understand them it's possible (even likely) that you won't properly understand your budget status and you may make wrong decisions based on misunderstanding.

8 comments
me.g33k
me.g33k

My method is a combination of the various items mentioned. Like all good IT folks I rely heavily on baselines. I look at what was spent in years past and correlate with business activities (including projects) and then use that as a basis for adjustments. There are elements of and IT budget that are relatively fixed. Things like staff salaries, telecommunications trunk costs, maintenance charges, etc. These are the foundation of the budget and their due dates are the cash flow markers. Then you take planned/anticipated projects (use past business/it interaction as a baseline for analysis) and their schedules and layer that on-top of the fixed items. Next comes other planned expenses and allocations for operational costs. Then after all that, you then take uncontrollable factors (like inflation, contingency costs) and add them. A properly designed planning spreadsheet makes this very easy to analyze and also to update and use as a what if tool. I found that using this method, I never over-ran my operating budgets in my seven years while I was running the Shipyard.

jlauder
jlauder

This article is a very rudimentary beginning to a discussion regarding budgeting. As a CPA and CFO, I probably have more financial expertise than most tech people so I feel safe in saying that this information, while helpful, is not nearly enough to plan a budget. I will point out a couple of things. First, given the normal automated process of accounting systems these days, an interim financial statement should be available from the finance department. It will help if you let the finance staff know well in advance that you would like that information and to understand that it will not be complete. For example, it is usually the case that items such as depreciation will not be entered until month-end. Payroll also will not usually be accurately reflected on an interim basis. Second, the article also mentions reviewing the methodology for recording expenses. Unless a business is very small or a state government, it's mandatory to use the accrual method of accounting. Revenue is recognized when a sale is made or service rendered, not when payment is received, and expenses are recognized when an item is purchased or an obligation is incurred, not when payment is made. The only lag in reporting expenses will be the time between when an invoice or other bill is received and when it is entered into the accounting system. Budgeting is about 80% technical and 20% experience. That $1000 expense from last year may or may not be $1025 this year, reflecting inflation. The original $1000 may have been unusually high or low; inflation in a particular line item may be higher than other items (think heating or many metals), or the cost may actually be decreasing. As the saying goes, the only hard and fast rule for budgeting is that there are no hard and fast rules.

Deadly Ernest
Deadly Ernest

advice given to project managers in the 1980's. Back in the early 1990's my main work was financial and resource management. I was working in the Australian department of defence and developing a new financial management structure for a military base using to very important financial systems: 1. Activity Based Costing Here you identified every activity, sub-activity, and the resources involved. you costed them out. The critical thing was ensuring that the charging structure was aligned with your costing structure and applied within the corporate accounting system. 2. Zero Based Budgeting. This required you to identify every cost, exactly the cost and track each one. Doing away with the old "Last year we had $x, add inflation, add new projects = $y" process. You list everything and start as if you had no money last year. use last years records to give an idea of usage and costs only. The result of melding these two systems is that you end up with a very long list of everything you do, very similar to the resource list from a good project management program. Every activity includes a breakdown of every part of it. The list has an anticipated action time and a cost estimate for each item. As you start an item you note that on your list, also the finish time, and also every cost involved (in time, labour and money). You should also note when the invoices arrive and the charges sent off to accounting. You also tick off each item when you see it on the corporate accounting print out each week/month. The most important thing is to update the list every time you have to change anything. The next important point is to challenge every thing charged to you that is NOT from your list. ------------- One unit I worked with in Defence had a budget in the hundreds of millions. No one challenged the accounting records as the always ended the year under budget (most projects ran late), they were all technical people with little financial understanding. I applied a simplified version of the above. I started doing accounting checks of the projects and found many cases of wrong charges (some deliberate by other units who ran out, some accidental), and some cases of duplicate invoices by the contracted companies. I found enough to have half a million dollars of charges redirected to other internal units, and enough to justify paying $400,000 to auditors to go in and do a 100% audit of four companies - they ended up repaying just over $8.2 million of over charged accounts. After this I developed an easy spreadsheet layout for them to do this with their projects, and funding was much better managed after that. editted to add The spreadsheet was done 15 years ago in the first version of Excel - it was a simple spreadsheet with columns for Milestone, Task, Invoice, amount, date issued, date paid, account code, and authorisation number. They could sort on any column and the bottom had an autosum on the amount.

gordon.rudd
gordon.rudd

I really don't know how to express my thoughts on this article...it really does puzzle me a great deal. It is puzzle me on many levels. It is easy to understand the potential misrepresentation of a projects actual status by waiting on the corporate accounting system for information; however, who would ever run any project without knowing specifically what was budgeted a specifically what had been spent against the budget. Spreadsheets are your friend? It has been my experience that you can never count on the corporate accounting system to accurately account for project expenses?project managers must constantly monitor what really happened against what is being charged to their projects. In most corporations accounting doesn?t know what?s happening with any project and as all IT pro?s should know, the people coding the transactions into the accounting system (even when automated) are sometimes fed inaccurate information.

drowningnotwaving
drowningnotwaving

I can't add to the 'budget' side of the discussion to the good points already. I will point out that the budget is just one tool and any manager, or management, who fanatically sticks to it (and we all have met someone like this) is in severe danger of missing opportunities and reality. Being 'under budget' can be good and bad. Being 'over budget' can be good or bad. And those can apply to any number of things - IT projects, inventory, headcount, capital etc. I am not underestimating the budget nor the need for planning whatsoever. It needs to be reviewed in an air of reality for the people, the company, its customers and the economic climate. Unfortunately our climate of quarterly reporting to the "market" means that the effort required to understand the reality is bludgeoned by the need for speed of the report, or the need for the 'ratios' not to be out of whack.

thinkdata
thinkdata

I just had lunch with a friend who was describing the classic catch-22: no design - no money, no money - no design. They create a WBS for new projects down to the nth detail w/o a wit of research, then are forced to live within it for the life of the project.

Deadly Ernest
Deadly Ernest

That was done 15 years ago in the first version of Excel - it was a simple spreadsheet with columns for Milestone, Task, Invoice, amount, date issued, date paid, account code, and authorisation number. They could sort on any column and the bottom had an autosum on the amount.

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