This first step plans the successor, the template is the current job.The budgeting of projects is often given the strongest focus in the run-up to a project. No wonder, while information about WHAT and WHEN finds its way into the boardrooms only sporadically as of today, the dear money has always been part of operational and strategic planning at the highest level. But how exactly do you determine a budget and what do you do with it afterwards?
What is this budget that everyone is always talking about?
The budget itself can be described as the operational planning of resource allocation, usually represented by financial ratios. In simple terms, the budget represents the financial resources needed to achieve a goal. Corporate budgets include both operational and administrative expenditures, both in line and for projects. The preparation of a budget plan is often divided into the following steps
- the delivery units are requested to report their budget requirements
- line and project prepare rough calculations of internal and external costs
- the resulting individual budgets are aggregated by department and area and reported to the decision-making body
- here it is decided who gets which budget and in which amount
- Reduced budgets must then often be translated into concrete operational implementation (which positions are eliminated, which projects are cut, etc.)
- During budget implementation, consumption is measured and any shortfalls or surpluses are reported via the forecast.
A distinction can be made between short-term (operational) and longer-term (tactical, strategic) budgets. The process of budget compilation remains essentially the same for all types of budgets.
You can’t do without budgets!
Budgets have proven to be very useful in everyday business life, and today it is hard to imagine planning and controlling without them. There are many advantages to working with budgets.
First of all, before a budget is communicated, there is a certain amount of operational or strategic planning. This planning is, of course, the basis of all orderly action. The budget could therefore be understood as evidence that someone has already given it some thought. An attempt can also be made to determine a certain resilience by comparing the communicated budget with one’s own experience. However, caution should be exercised here, because the individual framework conditions of the scope and the timeline sometimes have a dramatic effect on the concrete budget amount. With approval, the desire for cost control moves from management to the employee. The employee now „only“ has to be measured against the specifications he or she has developed.
In contrast to the scope, the budget is also wonderfully concrete: I can divide it exactly, report it in percentages and present it magnificently in meaningful curves. This also allows me to compare budgets among each other very well, or move them between organizational units.
Last but not least, the budget is also an excellent progress metric – if I plan to spend 5 million euros in a year, I can compare actual spending with planned spending in each month (on a linear basis or according to some other function) according to the budget plan – and thus get indications of potential deviations from the plan. Of course, this is far from sufficient from a project controlling point of view, but if I see it in the budget, then I have a clear warning signal. Of course, the steering committee is still advised to continue monitoring all three main components of project planning (cost, time and scope).
But budgets also have their downsides, some of which follow directly from the benefits.
Can’t do without budgets?
Of course, such a budget calculation has to be done first. As with all „frontloading“ approaches (including the waterfall methodology itself), I can put almost any amount of effort into planning, and then present wonderfully designed plan documents with a high degree of fictitious accuracy. Why is this not accurate? Because no plan survives the contact with reality, and the amount of effort in planning only conditionally increases the probability of survival. The core characteristic of a project is its uniqueness („Take that, you template rollouts!“) – and in this lies always a planning uncertainty. On the contrary, it is all the more important that the planner takes these uncertainties into account and points out the imponderables and assumptions very clearly.
The budgeting process – almost independent of the planning level – is often much more ritualized (keyword: „anchoring bias“) than is good for it. It is a good idea to go back to zero from time to time in order to avoid working with inaccurate budget figures every year (another keyword: zero-based budgeting). Almost proverbial is also the still widespread maxim in management „Never accept iteration 1, always act down!“, whereupon planners very quickly got used to their own maxim: „Never communicate the realistic planning in iteration 1, but buffer sufficiently depending on the political general weather situation! This, of course, completely makes a mockery of the whole point of budget planning. Efficient use of funds, cost transparency and planning security go down the drain so that someone can adorn himself with „cost containment“. This is detrimental not only to the planning process, but also to the credibility of those involved.
Inherent in the natural uncertainty of budgets are two other related disadvantages. If budgets are too high, the budget manager has to fear that a) he will lose budgetary control immediately or b) he will lose budgetary control the next time. As a reaction, he can only do one thing: spend the remaining budget before anyone notices.
In the event of a budget shortfall, a project can quickly become operationally endangered because the money runs out. Cumbersome reapplication processes for a „normal“ deviation in resource requirements therefore damage the implementation, and – in the worst case – make it even more expensive. A project is often a complex web of stakeholders and suppliers. If these are external, every week of delay almost always costs money. When fundraising itself is the reason for delays, the cat bites the tail. Why is this so? The reason is mentioned above: unlike matter and time, money is reported through all levels directly to the top – it’s just a pity if this fact causes the variances to get bigger and bigger.
„Beyond Budgeting“ ftw?
Budgets still have their raison d’être, of course, and continue to be an essential factor in planning and controlling. It is only important to realize two things:
- Budgets have disadvantages, and these should be present when working with them.
- Budgets are not without alternatives, and there are situations in which it is possible to work very roughly or even without them (small projects, highly efficient substitute KPIs, management very close to the operational business).
An interesting approach is the so-called BBRT, which is researching alternatives to classical budgeting and could convince some well-known companies like Aldi, Toyota, Whole Foods or Ikea. In any case, these efforts are worth a second look if budgeting is not working optimally in your company.
I hope you enjoy your research,
