Projects are often a black hole when it comes to finances, and one difficult job could easily put you in the red. So how do you keep control of your project budget and not let it control you?
Plan, plan, plan
Planning is essential for any project, regardless of scale. Whether you are in a small business or large corporate, similar basic principles apply.
Planning usually starts with a business case, which should answer the following questions:
- What do we want to spend money on?
- Why do we want to spend it?
- How much will we spend?
- What is the return on investment?
- What is the risk to the business of not doing this project?
These questions provide an objective view of the project – is it going to be worthwhile?
The hardest part of project planning is usually forming an accurate view of the costs. Most projects go over budget because certain costs were not factored into the initial budget, or because the scope of work changed, or delays caused costs to blow out – particularly if consultants were hired on a day rate.
To avoid this, be very clear in the planning stage about what you actually want, and document your requirements – whether you are dealing with your own staff or external service providers. When requirements are not fully communicated in the planning stages, key items may be missed which will be more expensive to add later. You may be told these items are “out of scope” while you had assumed they were included.
Different parties involved in the project will see the requirements differently. This means there’s a potential for mismatch between what is actually produced and what is billed, so never assume everyone is on the same page.
Once your planning is complete, collate all your project costs in a cost model. This can be done through simple accounting software to manage all your cash flow, or you may use more sophisticated project management software. Add up your costs and add a contingency of at least 10%. If you need to gain approval for funding, request the total including contingency.
Track and go
Once you are past the planning stage and have a clearly defined set of requirements and costs, keep a close eye on progress through regular project team meetings and reports highlighting any items in the critical path to being able to complete on time and on budget.
As each cost becomes known (time spent or invoices received), update your cost model and your total project spend and compare to your project budget. Look into any overspend, and allocate money from your contingency pool if needed. Revisit all estimates with suppliers regularly if there are any changes to the work agreed.
If new work is agreed outside the project budget, create a new business case or change request starting with the same five questions, and track the costs of this work separately. This means you can monitor the true project cost, and also be aware of all scope changes, questioning why they were not initially included.
You will always face project challenges that can lead to more costs – staff turnover, shipping delays, exchange rate fluctuations, weather conditions, redesign or added scope. So it is important to have some contingency funds for items that you can’t control. But you can minimise overspend in the areas you can control thorough careful planning and documentation, and holding all stakeholders accountable to that plan. It’s hard to argue with a detailed set of requirements, clear picture of the end goal and detailed costs and milestones.
Need a solid budget to help you track cash flow against expenses and how much revenue you need to keep growing? Get your finances in order with these top tips for creating a smart, effective business budget.
To read more articles related to small business finance, visit here.