In this series of blogs, I’ll be focusing on particular issues regarding the management of performance. In each case we will examine what causes the issue and then show how they can be overcome with the application of suitable technologies. In this first blog, I will look at how organisations should budget when they are dependent on large-scale projects or customer orders whose timing is uncertain.
Annual budgeting is a process by which resources are allocated throughout an organisation in order to achieve corporate goals. The traditional approach typically involves reviewing what happened last year and then setting incremental budgets based on inflation and business trends. This works well for organisations where income and expenditure are a continuation of business activities whose trend is fairly predictable. But what happens when financial performance is tied to a large customer whose contract start date is unknown? Or what if income is dependent on a set of activities being accomplished, but whose duration is dependent on other factors not yet known? For these organisations, setting a monthly budget by referencing what happened last year doesn’t make sense, as it will only generate expectations in specific periods that are then hard to change once the real dates are known.
The solution to this dilemma is to implement a project based approach to budgeting. With this approach budgets are split between:
- Income/expenditure that are known. i.e. those costs that are independent of any particular customer or project. This could include an element of ‘business as usual’ i.e. that part of the business whose trend is predictable and where income/costs are fairly fixed.
- Projects / initiatives. These are particular customer contracts, projects, and/or strategic initiatives. In this case, the related costs, income, start date and duration can be guessed but will be more accurately assigned once the project starts.
A modern budgeting software solution is able to support the above approach. For example, Financial Driver has a number of business dimensions that are typically used to set up a traditional approach to budgeting and management reporting. These include accounts that are used to hold the measures and resource to be planned; units that represent the organisation structure from which the accounts are to be collected; time and year that determine the period and year for which data is held, while version is used to separate actual results from budgets, forecasts, etc. To implement a project-based approach to budgeting, Financial Driver has an extra dimension that can be used to hold an unlimited number of projects. This dimension can consist of members that include 'Business as usual' (or Overheads) plus any projects/contracts/initiatives that are to be tracked. These can be arranged as a hierarchy, for example to show related projects, or orders from the same customer.
Financial Drivers ‘project/customer’ dimensionThis means that when collecting budgets or forecasts, income and expenditure can be assigned to a range of projects/contracts whose details are kept separate from the main budget. As these projects become active, the budget along with the start/end date can then be adjusted as appropriate, and monitored for implementation. This allows management to assess whether a project is being implemented according to plan as well as being able to collect forecasts to ensure it receives adequate resources to completion.
Separating project details from Overheads/’Business as usual’Although these projects are being kept separate, Financial Driver will also accumulate them to give the total budget picture.
Project-based budgeting can provide organisations with a more relevant process where income/expenditure is tied to major projects or customer orders. It’s a process that can readily adapt to change and where management can alter priorities based on variable market conditions.