The Basics of Budgeting
A budget is a tool that is used by all departments within an organization, though the interpretation of the budget may vary. A project manager would look at it differently from the owner. The accountants would have their own view of the budget as would the sales team allied with a project.
Project costs govern project budgets but are only used as a starting point for the preparation of the budget. Project costs have to include the total cost of any item or task including taxes, shipping and hourly usage hours, if any. Once such costs are identified the risk factor for each task, its effect on the overall project and other likely contingencies need to be factored in.
A budget must always be first seen as an estimate that requires the concurrence of all the stakeholders in the project, including the project team. Only when there is complete agreement on all the figures in the budget, financial or otherwise, should a budget be circulated to concerned project members. Only then does it become a document that will guide operations while executing the project. It is very necessary that all projects are completed within the budgeted figures. When there is a large variance there may be laxity on the part of the project team in estimating requirements. This does not bode well for future projects.
A project budget has to include all projected expenses for a project whether they are land costs, salaries, overhead, equipment costs, costs of subcontracting, taxes or other direct and indirect costs.
Budgets also must comply with the owner's requirements. Factors that affect finances, include resources and timeliness. Utilizing a particular technology may influence budget preparation. Those factors will influence the different ways to prepare a project budget and the emphasis that each area must receive.
Budgets may be prepared by top management of a project team and imposed on the lower layers of the organization. Such budgets will generally stress performance goals and expectations of the management with regard to time, equipment and resources that the project has been allotted. While such budgets can serve as guidelines, they rarely address the actual needs on the ground and the realities that every project team has to face.
On the other hand a bottom-up budget prepared by project team members actually involved in the project will be more realistic. This kind of budgeting increases employee morale and gets them completely involved in the project–and committed to staying within budget. The disadvantage of this method is that team members rarely see the overall needs of the organization and may also have insufficient knowledge of certain enhancement or expansion plans that are down the road.
Project budgets can also be made separately for planned resources whether they are for manpower or equipment. These resources have to follow the overall budget and the resources that have been allocated there during the financial projections. Such budgets are better made by project team members directly concerned with the execution of the project.