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Every year companies embark on a very challenging activity – the creation of the annual budget. There is a large investment of time and money to make the budget a valuable tool for the business.
So, what is the role of a budget? It should represent what the business believes is achievable and what it intends to accomplish. The organization establishes a budget that becomes the baseline for performance management. Follow the 8 tips below to create a budget that is a useful tool for your business:
1. Start the budgeting cycle with a timeline, assumptions, and goals and make sure that all stakeholders understand the ground rules.
2. Establish clear guidelines for the budget process. Below are just a few examples:
- Start and stop dates?
- When is the budget due to finance?
- How to incorporate the opportunity pipeline?
- What is the growth rate expected?
3. Use a collaboration tool to provide all stakeholders with the visibility and control they need over the budget.
4. Establish a business cadence and hold monthly/quarterly reviews where the budget is reviewed and updated for change.
5. Time-phase the budget and align it to the period of performance
6. Model the best case, most likely, and worst-case scenarios. A tool that allows for what-iffing or modeling is a necessity.
7. Analyze rate differences whether they be OH, G&A, COM, or Labor Rates. Make sure your tool is flexible enough to account for project specific rates, ceilings, and budget as well as forecasting rates.
8. The budget is a dynamic document…keep it up to date with changes.
Budgeting revenue is crucial as it drives many other metrics (profit, growth rates, etc.). The revenue plans are the barometer of your company’s health. The revenue plan will contain awarded contracts and opportunities that are still in the pipeline, so make sure both are included.
Tips for revenue budgeting are below:
- Look closely at your pipeline for new opportunities
- Understand how your profit is trending
- Labor vs Subcontractor – examine closely
- Examine backlog, breaking it out between opportunities and awarded work
- Benchmark your expenditures with prior years
Look Closely at Your Resources
People are by far the biggest investment and in turn, it is the largest revenue generator for services based companies. Resources should be managed during the entire project lifecycle: starting a proposal, project initiation, execution, and closeout. Measuring the utilization of resources is critical and below are a couple of questions you should be able to answer.
- What utilization do you need to meet profitability goals?
- Understanding billable and non-billable utilization?
- What utilization should you aim for to avoid burnout?
- Project probability in people forecasting to more accurately understand both billable revenue and utilization?
Indirect Rates are Pivotal
The management of indirect rates can be the difference between winning a bid, losing a bid, making profit, and the ability to grow. It is critical to have the ability to look both at the actual rates being charged as well as bid rates to determine profit by resource. Often, proposed rates will be different than actual rates, budget rates different than forecast rates, forecast rates are different year over year, and having the ability to apply multiple rate scenarios to your direct cost is very valuable in helping you create your forecast.
Rates play a big role in revenue baseline assumptions. For instance, if your overhead rates are less than you predicted on cost plus projects the actual revenue recognized will be less. On fixed price projects, higher than anticipated rates will eat into planned profit. Having revenue forecasts for the 1-5 year horizon will help the finance team more accurately predict corporate or forward pricing rates. Managing rate forecasts are important for all contract types and communication of rate changes to project and proposal teams will help eliminate a rate impact surprise. Below are a couple of pointers for indirect budgeting:
- Don’t forget to budget your indirect costs.
- Look at labor utilization to better understand the indirect component.
- Do you have a system that will handle cost pools and allocations?
- Understand your sales forecast and demand for resources.
Hope these tips helped spark new ideas for your budgeting process and gave you some new things to think about. We wish you a smooth budgeting cycle and a very prosperous 2018.
For project based businesses, planning must be top of mind. If you’d like to read more about project management best practices, view Unanet’s blog, The Business of Projects.