Understanding Project Budgets
Kathleen Benham, founder of Benham Conway & Co Chartered Accountants runs through project budget essentials.
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Kathleen Benham, founder of Benham Conway & Co Chartered Accountants runs through project budget essentials.
If you are doing a project you need to have a really robust budget. Firstly to persuade the stakeholder to invest in you and the project. And, secondly so you personally don't end up running out of money.
Your budget should reflect your vision. It's the quality of the idea and team that come first not the numbers. Ultimately funders will invest in a strong creative project – the idea has got to be good and there needs to be trust in the person or team who are delivering it. Then they want to know if the numbers stack up. The budget reflects your idea in another language, the financial language.
If you get your budget wrong you can end up financially in a very difficult situation. So devote time to the budgeting process. Don't leave it until the last minute. Don't see budgets as something you have to do to get money. Give them the respect they are due.
First of all you have to look at all your potential sources of income. Do this very simply by literally listing every potential income stream you think your project is going to be able to receive. Then project the amount that income could be. This can be one of the hardest elements of a budget. Sometimes a good starting point can be a project or something similar you have done before. However be aware that things are different from year to year, the landscape can change, competitors change.
Similar to income, you have to work out all potential costs. Think of your fixed costs and variable costs. Fixed costs are costs you are going to have to pay regardless of how much you sell or deliver. An example of fixed costs, if you've got premises, would be rent and insurance. And then you've got variable costs, those that change with the amount you create and sell. For example, costs for materials, delivery, fees and hires can vary the more work you make or perform.
After you have been through every single line of your income and costs put in your contingency. This is very important. The unexpected happens – so always put in a decent contingency. A contingency can be a fixed amount, but it is more commonly a percentage of the overall project costs or of a specific cost within the project, e.g. staffing. There isn't a sophisticated calculation for contingency. Working out what it is often comes with experience. If you are needing experience don't forget you can ask the advice of others, learning from their mistakes. An interesting approach with Excel is to create budget scenarios where you adjust your income whilst keeping your expenditure the same and look at the impact. It is a useful way to see how you might adjust your contingency or estimate your income. The more you know your figures, you'll know what the percentages are and where they go.
That is not the end. When you have compiled your budget, and it is something that people often miss out, you need to work out the surplus, if you've got one fantastic. You may just be looking to break even. However there may be tax due on the surplus and you must always ensure that you do not spend money which actually belongs to HMRC.
So your budget works. You send it to your funder in your project proposal. You get it approved, that's wonderful. What you haven't taken into account is all your costs are up front and the income doesn't come in until later. So do a cash flow.
Cash is king. Remember when you are looking at your budget don't just go through all the income, costs and contingency, also think am I going to run out of money at any point. It might be you will have a surplus at the end of the project but part way through you have a deficit. If you can identify this will happen in advance you can say to your funder 'We've done the cash flow for this project and instead of giving us 40%, 40% and 20% can you give us 60%, 20% and 20%?' Your funder would much rather your project works. So looking at cash flow is important and something a budget template often omits.
A budget template is not a catch all detailing all possible income and costs from which you pick the ones that apply. It's really not like that. Your business, your project is unique to you. You will know infinitely more about it than anyone else – including an accountant.
An accountant can always go through basic costs. However, the best thing they can do is really challenge the thought processes that have gone in to writing the budget:
The answers to these questions are not numbers but they do have a huge impact on the numbers. So do your budget, but speak to others. If you can't afford an accountant speak to a friend who is good at budgeting their own finances at home. Say to them 'Can you think of anything I've not thought of?' They may identify things you've not seen because you've spent so much time thinking about it.
People tend to think a budget is rigid. It isn't. If you notice early on that something is not as you thought it was, for example an increased cost, you have to recognise it. Yes you've got your contingency but can you cut a cost that was maybe a bit of a luxury so that you are not eating into your contingency right away? You have to be flexible and monitor your budget. It's not a case of once your budget is done its done. The budget isn't to be done just for the stakeholder. It's for you. It's really for you because you are the one that's not going to be able to get paid if the project finances aren't managed well. To a certain extent once the stakeholder has given you the money they are hands off. So it is really important to make your budget work for you.