Feb 24, · Every good budget should include seven components: 1. Your estimated revenue This is the amount you expect to make from the sale of goods or services. It’s the cash you 2. Your fixed costs These are all your regular, consistent costs that don’t change To do so, keep these in mind: Set an allowance. There may be circumstances where you’re forced to spend more than you normally do. Prepare yourself by Be practical. You need to set your budget at a considerable amount based on your income and what is needed. Track your budget. Even when a budget Budgeting and business planning. Once your business is operational, it's essential to plan and tightly manage its financial performance. Creating a budgeting process is the most effective way to keep your business - and its finances - on track. This guide outlines the advantages of business planning and budgeting and explains how to go about it. It suggests action points to help you manage your business' financial position more effectively and ensure your plans
Budgeting and business planning
Every project boils down to money, budgeting plans business plan. If you had a bigger budget, you could probably get more people to do your project more quickly and deliver more. But no matter whether your project is big or small, and no matter how many resources and activities are in it, the process for figuring out the bottom line is always the same.
It is important to come up with detailed estimates for all the project costs. Once this is compiled, you add up the cost estimates into a budget plan. It is now possible to track the project according to that budget while the work is ongoing. Often, when you come into a project, there is already an expectation of how much it will cost or how much time it will take. When you make an estimate early in the project without knowing much about it, that estimate is called a rough order-of-magnitude estimate or a ballpark estimate.
This estimate will become more refined as time goes on and you learn more about the project, budgeting plans business plan.
Here are some tools and techniques for estimating cost:. Once you apply all the tools in this process, you budgeting plans business plan arrive at an estimate for how much your project will cost. That way, you know the assumptions made when you were coming up with the numbers.
Now you are ready to build your budget plan, budgeting plans business plan. During the conceptual phase when project selection occurs, economic factors are an important consideration in choosing between competing projects. To compare the simple paybacks or internal rates of return between projects, budgeting plans business plan, an estimate of the cost of each project is made.
The estimates must be accurate enough so that the comparisons are meaningful, but the amount of time and resources used to make the estimates should be appropriate to the size and budgeting plans business plan of the project.
The methods used to estimate the cost of the project during the selection phase are generally faster and consume fewer resources than those used to create detailed estimates in later phases.
They rely more on the expert judgment of experienced managers who can make accurate estimates with less detailed information. Estimates in the earliest stages of project selection are usually based on information from previous projects that can be adjusted— scaled —to match the size and complexity of the current project or developed using standardized formulas.
An estimate that is based on other project estimates is an analogous estimate. If a similar project cost a certain amount, budgeting plans business plan, then it is reasonable to assume that the current project will cost about the same. Few projects are exactly the same size and complexity, budgeting plans business plan, so the estimate must be adjusted upward or downward to account for the budgeting plans business plan. The selection of projects that are similar and the amount of adjustment needed is up to the judgment of the person who makes the estimate.
Normally, this judgment is based on many years of experience estimating projects, including incorrect estimates that were learning experiences for the expert. Less-experienced managers who are required to make analogous estimates can look through the documentation that is available from previous projects. If projects were evaluated using the Darnall-Preston Complexity Index DPCIthe manager can quickly identify projects that have profiles similar to the project under consideration, even if those projects were managed by other people.
The DPCI assesses project attributes, enabling better-informed decisions in creating the project profile. This index assesses the complexity level of key components of a project and produces a unique project profile. The profile indicates the project complexity level, which provides a benchmark for comparing projects and information about the characteristics of a project that can then be addressed in the project execution plan.
It achieves this objective by grouping 11 attributes into four broad categories: internal, external, technological complexity, and environmental. Comparing the original estimates with the final project costs on several previous projects with the same DPCI ratings gives a less-experienced manager the perspective that it would take many years to acquire by trial and error.
It also provides references the manager can use to justify the estimate. John sold his apartment and purchased another one. It is now time to plan for the move. John asked a friend for advice about the cost of his move. I did it with a foot truck. If the project consists budgeting plans business plan activities that are common to many other projects, budgeting plans business plan, average costs are available per unit.
For example, if you ask a construction company how much it would cost to build a standard office building, the estimator will ask for the size of the building in square feet and the city in which the building will be built.
Factors like size and location are parameters —measurable factors that budgeting plans business plan be used in an equation to calculate a result.
The estimator knows the average cost per square foot of a typical office building and adjustments for local labour costs. Other parameters such as quality of finishes are used to further refine the estimate. Estimates that are calculated by multiplying measured parameters by cost-per-unit values are parametric estimates.
The company assumes that the number of bedrooms is the important parameter in determining how big a truck is needed for a move. John has a one-bedroom apartment, so he chooses the foot truck. Once the size is determined, other parameters, such as distance and days, budgeting plans business plan, are used to estimate the cost of the truck rental. The most accurate and time-consuming estimating method is to identify the cost of each item in each activity of the schedule, including labour and materials.
If you view the project schedule as a hierarchy where the general descriptions of tasks are at the top and the lower levels become more detailed, finding the price of each item at the lowest level and then summing them to determine the cost of higher levels is called bottom-up estimating.
After evaluating the bids by the moving companies, John decides the savings are worth his time if he can get the packing done with the help of his friends, budgeting plans business plan.
He decides to prepare a detailed estimate of costs Table He looks up the prices for packing materials and truck rental costs on company websites and prepares a detailed list budgeting plans business plan items, budgeting plans business plan, quantities, and costs.
This type of estimate is typically more accurate than an analogous or parametric estimate. The estimate can be rolled budgeting plans business plan display less detail. This process is made easier using computer software. On projects with low complexity, the cost estimates can be done on spreadsheet software.
On larger projects, software that manages schedules can also manage costs and display them by activity and category, budgeting plans business plan. For example, the subtotal feature could be used in Excel and collapsed to show the subtotals for the two categories of costs Figure An activity can have costs from multiple vendors in addition to internal costs for labour and materials. Detailed estimates from all sources can be reorganized so those costs associated with a particular activity can be grouped by adding the activity code to the detailed estimate Table The detailed cost estimates can be sorted and then subtotaled by activity to determine the cost for each activity.
Projects seldom go according to plan in every detail. It is necessary for the project manager to be able to identify when costs are varying from the budget and manage those variations.
If the total amount spent on a project is equal to or less than the amount budgeted, the project can still be in trouble if the funding for the project is not available when it is needed. There is a natural tension between the financial people in an organization, who do not want to pay for the use of money that is just sitting in a checking account, and the project manager, who wants to be sure that there is enough money available to pay for project expenses.
The contractors budgeting plans business plan vendors have similar concerns, and they want to get paid as soon as possible so they can put the money to work in their own organizations. The project manager would like to have as much cash available as possible to use if activities exceed budget expectations.
Most projects have something unexpected occur that increases costs above the original estimates. If estimates are rarely exceeded, the estimating method should be reviewed because the estimates are too high. It is impossible to predict which activities will cost more than expected, but it is reasonable to assume that some of them will. Estimating the likelihood of such events is part of risk analysis, which is discussed in more detail in a later chapter, budgeting plans business plan.
Instead of overestimating each cost, money is budgeted for dealing with unplanned but statistically predictable cost increases. Funds allocated for this purpose are called contingency reserves. Because it is likely that this money will be spent, it is part of the total budget for the project.
If this fund is adequate to meet the unplanned expenses, then the project will complete within the budget. If something occurs during the project that requires a change in the project scope, money may be needed to deal with the situation before a change in scope can be negotiated with the project sponsor or client. It could be an opportunity as well as a challenge. For example, if a new technology were invented that would greatly enhance your completed project, there would be additional cost and a change to the scope, but it would be worth it.
These funds are called management reserves. A project manager must regularly compare the amount of money spent with the budgeted amount and report this information to managers and stakeholders. It is necessary to establish an understanding of budgeting plans business plan this progress will be measured and reported. John tells his friends that the project is going well because he is halfway through the project but has only spent a fifth of his budget.
Basic measures such as percentage of activities completed, percentage of measurement units completed, and percentage of budget spent are adequate for less complex projects, but more sophisticated techniques are used for projects with higher complexity. A method that is widely used for medium- and high-complexity projects is the earned value management EVM method.
EVM is a method of periodically comparing the budgeted costs with the actual costs during the project. It combines the scheduled activities with detailed cost estimates of each activity. It allows for partial completion of an activity if some of the detailed costs associated with the activity have been paid but others have not. The budgeted cost of work scheduled BCWS comprises the detailed cost estimates for each activity in the project.
The amount of work that should have been done by a particular date is the planned value PV. These terms are used interchangeably by some sources, but the planned value term is used in formulas to refer to the sum of the budgeted cost of work budgeting plans business plan to a particular point in the project, so we will make that distinction in the definitions in budgeting plans business plan text for clarity.
On day six of the project, John should have taken his friends to lunch and purchased the packing materials. The portion of the BCWS that should have been done by that date the planned value is shown in Table This is the planned value for day six of the project.
The budgeted cost of work performed BCWP is the budgeted cost of work scheduled that has been done. If you sum the BCWP values up to that point in the project schedule, you have the earned value EV. The amount spent on an item is often more or less than the estimated amount that was budgeted for that item, budgeting plans business plan. The actual cost AC is the sum of the amounts actually spent on the items. Dion and Carlita were both trying to lose weight and just wanted a nice salad.
Consequently, the lunch cost less than expected. John makes a stop at a store that sells moving supplies at discount rates. They do not have all the items he needs, but the prices are lower than those quoted by the moving company.
What is Budgeting and Planning?
, time: 6:00Budget Planning – Project Management
To do so, keep these in mind: Set an allowance. There may be circumstances where you’re forced to spend more than you normally do. Prepare yourself by Be practical. You need to set your budget at a considerable amount based on your income and what is needed. Track your budget. Even when a budget Second, the business plan is a requirement if you are planning to seek loan funds. It will provide potential lenders with detailed information on all aspects of the company's past and current operations and provide future projections. The text of a business plan must be concise and yet must contain as much information as possible Budgeting and business planning. Once your business is operational, it's essential to plan and tightly manage its financial performance. Creating a budgeting process is the most effective way to keep your business - and its finances - on track. This guide outlines the advantages of business planning and budgeting and explains how to go about it. It suggests action points to help you manage your business' financial position more effectively and ensure your plans
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