Project Based Budgeting
The Challenge:Do you allocate budgets to individual departments in your organisation based on what happened last year plus X%?
This is fine if you know roughly what the income and expense will be because of a continuation of business activities with a fairly predictable trend, but if your financial results depend on large single orders or the timing of crucial projects, this approach simply doesn't work.
So, if your organisation is more complex, you'll find it hard to set budgets as they normally assume all projects and timings are known accurately up to 15 months in advance. It also makes them inflexible when responding to unexpected changes within a project.
The Solution:Budgets should be split into two areas:
- Those that represent overheads where resources can be allocated in the traditional way.
- Those that are project-based, which may represent specific customer orders or defined strategic initiatives.
- Manage expenditure with regard to legal commitments
- Link expenditure directly with strategic initiatives and objectives
- Assess the impact of projects whose timing has changed from plan
- Monitor the status of implementation
- Collect forecasts of resources required to complete a project