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.
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.