Enterprise Budget Management

What is Enterprise Budget Management?

Every business enterprise plans its journey toward strategic objectives and prepares for the journey with an action plan called a budget.  A budget can accomplish various tasks:

• Cover a short time span. A start-up company develops a budget to ensure that it will have enough cash to cover operating expenses for twelve months or so.
• Take a longer-term perspective. A pharmaceutical firm builds a multiyear budget for developing a new product.
• Focus on required resources for a specific project. If a manufacturing firm needs to install machinery to achieve production efficiencies, then its budget will anticipate the cost of the installation.
• Account for income as well as expenditures. A retail company creates a profit plan based on an expected increase in sales.

An enterprise budget is the translation of strategic plans into measurable quantities that express the expected resources required and anticipated returns over a certain period.  A budget functions as an action plan.  It may also present the estimated future financial statements of the organization.  Finally, a budget is an adaptable tool for management to use to achieve its strategic goals.

Enterprise Budget Management involves:

1. Planning

Planning is a three-step process to ensure that the organization will have the resources available to achieve it goals.  Planning covers –

1. Choosing goals.
2. Reviewing options and predicting results.
3. Deciding on options.

2. Coordinating and Communicating

Enterprise budget compiles the individual budgets from the functional areas of R&D, design, production, marketing, technology, etc. into one budget.  Then the budgets from individual divisions, product lines, and subsidiaries are coordinated and integrated into a larger, cohesive result.  The master budget brings all the pieces together to achieve the organization’s overall strategic plan and company mission.

To achieve the coordination needed, communication is essential.  The top management needs to communicate the company’s strategic objectives to all the levels of the organization, and the individual planners need to communicate their needs, assumptions, expectations, and goals to those evaluating the departmental and functional budget pieces.

3. Monitoring Progress

Once the plan has been set in motion, the budget becomes a tool that managers can use to periodically monitor progress.  They assess the progress by comparing the actual results with the budget.  This feedback, or monitoring and evaluation of progress, in turn allows for timely corrective action.

4. Evaluating Performance

Effective performance evaluation systems contribute to the achievement of strategic goals, and budgets provide essential tools for measuring management performance.  By comparing the actual results to the budget for a given period, an evaluator can determine the manger’s overall success in achieving his or her strategic goals.

What are the objectives of Enterprise Budget Management?

An enterprise budget is the translation of strategic plans into measurable quantities that express the expected resources required and anticipated returns over a certain period.  A budget functions as an action plan.  It may also present the estimated future financial statements of the organization.  Finally, a budget is an adaptable tool for management to use to achieve its strategic goals.

Key objectives of Enterprise Budget Management

Map business goals with funding requirements.

Organizations have varied goals and objectives that could be for short-term, medium-term, or long-term.  Business divisions / departments need funding to be able to deliver to objectives.  Enterprise Budget Management tries to understand and map the business goals with the available funding.

Decide borrowing strategies.

Based on the goals & objectives and the funding requirements, finance professionals may realize that funds may be insufficient for execution.  With these insights, the business leaders can decide the organizational borrowing strategies – for short-term, medium-term, and long-term.  Borrowing choices include loans, equity shares, bonds, etc.

Analyse the funding needs of projects and programs vis-à-vis operations.

Organizations have multiple functions, some of which are associated with revenue generation while some provide the necessary support for the company to run.  Enterprise Budget Management analyses the extent of funds needed for these broad set of activities.

Prioritize fund allocation to functional departments.

Enterprise Budgeting enables the senior management to decide the extent of fund allocation to various departments based on initiatives, projects, programs, and operations.  This is done to ensure that funds are allocated to areas that drive revenue and profitability.

Decide cashflow requirements.

Another important objective of Enterprise Budgeting is to understand the points in time of cashflow – inflow (revenue) and outflow (expenses).

Evaluate effectiveness of funds deployed.

Enterprise Budget Management ensures a close monitoring and review of every dollar spent by the organization.  It also allows the business leaders to make relevant adjustments to funding allocations to various departments based on their performance.  Doing so ensures that the company delivers optimum shareholder value.

How do you prepare a project budget and its major steps?

There are multiple ways to prepare a project budget including –

• Bottom-up budgeting (start with the lowest activity and summarize as you go up)
• Top-down budgeting (start with the project level activity and go down to lower levels of activities)
• Rolling-wave budgeting (the immediate project phase is detailed, while subsequent phases are at a high-level)

The choice of your budgeting depends on various project parameters including –

• Clarity of project requirements and scope.
• Stability of project requirements.
• Level of technical uncertainty of the project.
• Speed of project delivery (once completely, by phase, or iterations in agile)

Irrespective of the approach, project managers must review historical projects for the manner of budgeting as well as actual costs incurred.  Further, project budgets must be based on documented assumptions, constraints, etc.

Steps to prepare project budgets.

Understand the project revenue.

Before embarking on creating budgets, project teams must be aware of the revenue that the project is expected to deliver.  Further, the revenue could be driven by different contract types such as Fixed Price, Cost Plus, or Time & Material.  Budgeting is closely linked to the type of contracts and how revenues are generated.

Create a clear project work breakdown structure (WBS).

Better project financial project is built on the strong foundation of a robust work breakdown structure.  The WBS is a hierarchical decomposition of the project scope to be successfully executed by project delivery organizations. The WBS represents higher-level deliverables broken down to lower-level deliverables and further to activities and sub-tasks.

Tie every WBS deliverable / activity to a financial account.

To be able to accurately account for every dollar spent on the project, project managers must ensure to tie every deliverable / activity to a financial account.  Doing so enables accurate estimation and budgeting as well as tracking actual costs.  Further, this ensures that the team members “must” report actual costs to a WBS deliverable that is in turn linked to a financial account.

Estimate the costs for every WBS deliverable / activity.

The estimation depends on the approach, which is based on project specifics as listed at the beginning.  The project team must now estimate project costs at a granular level and bottoms-up, starting with tasks.  Tasks then roll-up to deliverables, then to work packages, and finally to the project.  It is important to note that the costs include material, labour, software, consumables, travel, overheads, etc.

Classify costs.

Using the estimates, the project team must classify the costs as direct, indirect, fixed, variable, committed, sunk, and others.

Define appropriate contingency.

Despite a detailed approach to cost estimation, there are many factors that are beyond the control of the project team.  Examples include, assumptions made, accuracy of estimates, resource choices, etc.  Based on the needs of the project and organizational standards, contingency is added to the rolled-up costs.

Arrive at the project budget.

The costs estimated at a granular level gets rolled-up to phase and finally to the project level.  To these costs, when we add the contingency, the project budget is ready.

How do you manage a budget in project management?

Your project has an approved budget.  You must manage the project within the budget.

Start with the Work Breakdown Structure.

The first step to manage project budgets is to closely review the work breakdown structure with its phases, sub-phases, work-packages, tasks, and activities.  Irrespective of how the costs were estimated before arriving at the project budget, it is now important to assign budgets at various levels of a project work breakdown structure.  Since deliverable ownership is different and based on the nature of the work, project budget must also follow a similar rigour.  A best practice could be to use clear WBS codes for every line item in the WBS.  This is useful for budget tracking.

Communicate WBS budgets to their owners.

Once the budgets at the WBS levels are finalized, project managers must clearly communicate the budget values to their respective owners and seek their commitment.

Define and communicate guidelines for using project budget.

Depending on the nature of the project deliverables, spending protocols could vary.  Customer contract for a single project could have diverse elements with different ways to manage costs.  It could be fixed price, cost-plus, or time & material.  Managing project budgets are different based on these contract types.  The project manager must clearly document the guidelines for the project team to spend money.  Further, depending on the value of the spending, specific review and approval processes may also be necessary.

Tie work completion with budget consumption.

Proactive budget management is critical.  For this, project managers must establish correlation between work completion status / percentage with budget consumption status / percentage.  Further, thresholds must be set, say 90% while work completion is still 75%.  Alerts and notifications enable proactive project budget management.

Set rules for exception handling.

Since projects involve different levels of uncertainty, the project manager must define ‘exception rules’ for spending money that were not originally estimated but become necessary during project execution.  Guidelines must be established for review and approval of such exceptional costs.

Tracking actual costs.

The key to better project management is the disciplined approach to tracking actual costs.  Project managers must ensure that tracking is done via robust project management software in a digitized way to eliminate data integrity issues.  Further teams must ensure that actual costs are tied to the WBS account codes that were originally used during estimation.  The team member who reviews the actual costs must match the WBS account codes.  Ideally, the project management software should not allow team members to report actual costs beyond the budgeted values.  An automated workflow should be triggered the moment actual costs exceed the budgeted costs.

Reporting project budget vs actuals.

Timely reporting of budget vs. actuals is critical to avoid a project cost overrun.  For this, project managers must depend on project management software that offer seamless analysis and reporting of budget vs. actuals.  Without having to ask reports, the chosen project management software must make such information available 24/7.

In fact, alerts and notifications should be triggered based on the status of work completion and budget consumption.  For example, 90% budget consumption while work completion is still 75%.  Managers should take proactive and corrective actions based on these alerts and notifications.

Forecast project costs.

Project managers must consider –

• Actual costs spent till date.
• Remaining work to be completed.
• Estimate of costs for remaining work.

Based on the above inputs, project managers should present a forecast of project costs, which should be within the originally approved budgets.  In case the forecast indicates an overrun, the project profitability would be negatively impacted.  Note that these forecasts could vary with every reporting cycle.

Use of contingency reserves.

Project managers must ensure that the project contingency reserves remain untouched or are used to address exception situations beyond the control of the project team.  Contingency reserves should not be used to cover up the team’s inefficiencies and lower productivity.