Cost is a critical factor of success in project management and, undoubtedly, the most essential parameter to consider when initiating a new project.
Just think about it: if the availability of financial resources is poorly predicted and the total amount of project expenditures is estimated incorrectly, will it really matter whether your team shows excellent performance and the quality of your services and products is superb?
If you want to sustain your initiative in the long run and gain a steady inflow of revenues, the right answer is “No.” In the situation of inadequate expense control, you will bear an increased risk of running out of funds too quickly, which can eventually compromise your ability to complete the project on time, if at all. For this reason, the creation of an accurate project budget contributes to both the effectiveness of cost management and the entire project’s outcomes and this article will prove to you that these are not just empty words.
Here we will explain why budgeting is so important for those who aspire to achieve outstanding financial and productivity outcomes. Besides, to help you start with the making of your own budget, we have prepared a free project budget template that may be downloaded at the end of the page.
Check out our free Project Cost Management guide for more tips on effective budgeting.
However, before delving deeper into the problem of budget significance and before you engage in the practice of budgeting yourself, let’s see what a project budget is and how it is made.
What Is Project Budget?
As a general term, budget is an account of expenditures and income over a certain period in the future. Based on this, project budget is defined as a sum of costs and revenues associated with a particular business endeavor and all the elements required to drive it towards successful completion.
These elements can be divided into two major groups: resources and activities. The first one normally comprises personnel, technology, knowledge, and other hard and soft assets, depending on specific project characteristics and aims. The second group of essential project elements may include supply, production, sale, delivery and other actions and operations that necessitate investment and are meant to serve ultimate project goals.
Moreover, it is important to remember that costs naturally vary contingent with:
- Timeframes
- Work scope
- Business and market background of the project
By affecting the amount and nature of expenditures, these factors influence budgeted expectations to a substantial degree too.
Budgeting Process
As the above definition suggests, cost estimation is the key part of project budgeting. It is usually carried out at the early stages in the project’s life cycle and implies an accurate and rigorous prediction of its future expenses based on the quantity and the price of the necessary resources and assets.
Nevertheless, budget development involves more than that.
Since cost estimates are directly influenced by project scope, timeframes and objectives, budget creation is always closely interrelated with strategic planning and analysis. Additionally, in a broader sphere of project cost management, budgeting goes hand in hand with various expenditure control activities. Among them, there are cost monitoring and budget evaluation that aim to ensure the ongoing compliance with formulated budget plans and assess the efficiency of resource distribution across different stages in project realization.
Benefits of Excellent Budgeting
All in all, budget management is an integral component of a comprehensive and highly strategical methodology with a purpose to verify that:
- The project has realistic goals,
- Its demands are feasible to satisfy,
- The team has sufficient resources at their disposal
- And the work on project-related tasks will go on smoothly till the end of the deadline.
As an early-stage activity in the process of project planning, budgeting plays a particularly important role in attaining these aims. Here are the three main reasons why:
1. Budgets provide economic justification for projects
When thinking up a new project, it is easy to overestimate your abilities, especially if you commence it in an unfamiliar field or plan to engage in an endeavor to which you have a strong (and irrational) emotional attachment.
Belief in success helps a great deal in motivating us to act, but too often it is not enough to reach excellent professional results. In the world of business, the use of calculative and analytical methods is a must, since they allow entrepreneurs to stay alert and take into account a multitude of diverse factors. Needless to say, budgeting rightfully belongs to the category of such valuable techniques.
By identifying, categorizing and figuring out project costs, it lets you see whether your business idea is worth proceeding with in terms of money. When making the budget, you may discover many types of costs – both direct and indirect – that you weren’t even aware of previously. Besides, by evaluating the profitability potentials of the intended business operations, you can determine if your project will actually bring any income.
Of course, not all worthwhile ideas are profit-oriented. However, you still want to have at least a tiny bit of savings and returns to keep the venture going in the long term. Budgeting will surely support you in finding out how big your profit margin and how lasting your funds can be. Your level of dedication to the practice of budget development and the depth of the carried out cost analysis are the only things to determine the clarity of the picture of your project’s future.
2. Project budgets help define tactics
As we’ve already learned, the core objective of budget creation is to disclose different kinds of costs that the project may entail. Therefore, your budget will support the making of higher-quality decisions not only regarding the way to spend the investment sum but also about the execution of project-specific tasks.
A detailed overview of possible expenses will help you set right priorities, which is particularly important in the context of financial constraints. With a well-prepared budget, you can see whether some of the planned project activities are too financially intensive and then choose to substitute them with cheaper alternatives. In case an expensive activity or resource is essential and cannot be discarded, your budget forecast will help you locate a few of the less significant but costly ones and set them aside instead.
In this way, by looking closely at every item in the project budget step by step, you may redesign your entire tactical plan until it is realistic and perfectly aligned with your long-term strategic goals.
3. Budgeting establishes the basis for spending control
Once you are sure that the project deserves your efforts and the means selected to attain the primary project goal are financially reasonable and appropriate, it is time for action. When the work on the project starts, the budget will serve you as the foundation to control spending.
With a good budget plan, cost monitoring becomes as easy as ever. Numbers identified during cost and income estimation will set the spending limits explicitly, so you and your team members won’t have to second-guess whether the project can afford another piece of expensive hi-tech equipment or that high-priced marketing campaign – the budget will provide a rationale for every spending decision.
By choosing to stay within the budget’s boundaries, you will minimize the risk of financial loss and maximize profit to a significant extent.
Outcomes of Poor Budgeting
When starting the project with a poorly created budget or without any budget at all, you miss out on the advantages we’ve discussed above and, instead of capturing the opportunity for project success, you increase the chance of project failure.
Poor budgeting can harm your business in two major ways:
- By causing tangible financial loss,
- And by having an adverse impact on such intangible business assets as reputation and customer trust.
1. Financial loss due to deficient cost control
While a well-developed budget helps you see whether the planned project activities meet your current financial capacities, with an inadequately performed budgeting, you are bound to make financial decisions based on assumptions and intuition alone.
As such, intuitive spending may not be a tremendous problem if you are highly independent as a worker and initiate a very small project that is easy to supervise. However, when multiple stakeholders and extremely diverse and numerous operations are involved in project realization, the lack of a holistic financial view is detrimental. Blind spending in large projects may negatively affect your ability to:
- Detect declines in funds in a timely manner,
- Predict the project’s risk tolerance,
- And select the right way to allocate resources.
Thus, without proper budgeting, you will bear an elevated risk of cost overruns and financial insolvency that will threaten the well-being of the project as a whole.
2. Damaged stakeholder relationships and reputation
As the project starts to lose money due to poor monitoring of spending, your ability to deliver on the desired business outcomes, including quality and customer satisfaction, will likely diminish correspondingly.
It can be quite painful to lose money and witness your endeavor collapse – you will surely need some time to recover from such an occasion. However, the negative experience and adverse consequences can increase multifold in case your project implies cooperation with many individuals and businesses (e.g., you specialize in the provision of educational services or the supply of raw materials to manufacturing companies). In this situation, your failure may cause a lot of trouble to stakeholders and, unfortunately, once you’ve become a source of major disappointment and loss for others, it takes an enormous amount of work to regain their trust.
Definitely, an accurate project budget plan cannot be the only salvation from reputation damages. Nevertheless, its creation will become a good beginning in the prevention of such a risk.
Basic Rules of Successful Budgeting
Now that you know why a well-developed budget is crucial, you’re probably wondering what is required to make it. The following brief list will give you a general understanding of things to consider throughout the budgeting process:
- The budget should be aligned with the project’s short-term objectives and long-term goals. In this way, you will ensure that the spending is meaningful and the allocation of resources is optimal.
- The budget shouldn’t rely only on intuition, as well as past activities and records. While previously collected data is important to take into account during the budgeting process, to be realistic, the budget should be future-oriented and based on original analysis of current external and internal factors.
- The budget must be made by using the right methods and techniques. With a more thorough and rigorous calculation of expenses, the accuracy of budget forecasts increases.
Keep these determinants of successful budgeting in mind when creating the project budget, and don’t forget to check out our free project budget template, which was designed to give you space and structure for estimating expenses of your new projects. Use this template to work out costs in an easy-to-read format and customize it by adding or deleting items in order to suit the specifics of your business.
Conclusion
Lastly, remember why effective budgeting is the key to good health and longevity of your project. By dedicating enough time and attention to budget development, you will obtain a clearer picture of your project’s financial future and your business’s capabilities to act on the project idea. In addition, with the help of the budget, you will be able to formulate a perfect tactical plan and monitor project expenses with greater efficiency. As a result, you will reduce the risk of cost overruns and financial failure while increasing profitability and quality of performance.
If these things are what you’re aspiring to, the creation of a sound budget will move you one big step closer towards their attainment.
