A project budget is a plan that outlines the company’s financial goals for a specific business activity. When working on projects within your business, it’s vital to establish a budget to ensure you have a reference baseline for expenses. If you don’t establish a budget, you may spend more than you need to on a specific project, which can negatively affect the rest of your business.
Project Budget Definition
There are two primary purposes for creating a project budget in your business: getting funding and controlling business costs. It is important to inform business stakeholders how much funding is required to complete your project and meet the objectives you have outlined. This also helps the company to understand the return on their investment in your project. Business stakeholders may include investors, the company’s management team or other business owners.
The project budget definition also includes controlling costs, which is imperative to running a successful business. With a project budget, the company has a clear view of how much each activity is going to cost. With that baseline in mind, you can compare actual costs of each activity within the project to the estimated budget to determine if the project is over budget, under budget or on target. Being able to see this during the progression of the project helps the project manager to determine if they need to make any changes to the project to ensure they stay on target.
How to Calculate Your Project Budget
Creating a project budget varies from company to company and from project to project. Budgets for larger projects can run several dozen pages in length, while small budgets often consist of only two to five line items. Regardless of how big your project is, a budget will ensure you’re staying on track. Keep these elements in mind when creating a budget for your project:
- Activity cost estimates: Be sure to figure out the cost of each individual activity within your project. That way, if you go over budget, you’ll be able to tell which activity resulted in the cost increase. Activities may include labor, materials, technology and facilities.
- Fixed costs: Determine which costs are constant and will not change throughout your project. These may include rent, utilities and technology.
- Variable costs: Outline the costs that may fluctuate during the project. For example, you may need to spend more on materials in the first two months, but very little on materials in the last two months of the project.
- One-time costs: Your project may require the purchase of a new software or new machinery. This is an expense that will just be made one time.
- Project schedule: It’s important to know how the costs are spread out over your project. This way, you can manage expenses by grouping certain costs together or planning ahead for increased expenses during a specific month.
Project Budget Best Practices
As per the project budget definition, it’s important to use the budget as a baseline to ensure your costs remain on track. Be sure to assign a team member to oversee the budget and note any anomalies. If any specific activities are constantly going over budget, it’s important to see whether those expenses can be curbed. On the other hand, if certain activities are always under budget, you may need to rework your estimates to ensure you have a more realistic budget.
Keep in mind that your budget doesn’t need to be set in stone. Re-evaluate your budget at specific milestones within the project timeline, keeping in mind actual expenditures. Work with a finance professional if you have a large project budget to ensure you have accounted for all of the related costs.