Planning and sticking to a budget is an integral part of project management. Planning a budget is one of the first steps when starting any project. Being unclear on costs and how things will be paid for is no way to start any project if you want to have the highest chance of success.
Without good budget planning, a project can quickly run into trouble. Getting to a critical point in a project’s planning and implementation only to find that you have to pause due to lack of funding can be disastrous. Luckily, with a little time and planning, this is avoidable most of the time.
Engineering project managers must make a step-by-step, easy-to-understand plan and implement a financial plan.
Project accounting encompasses all the financial aspects of a project
The accounting system implemented for a project includes total projected costs, billable accounts, potential revenue, and actual revenue after a project has been executed.
Project managers use the accounting system to keep track of financials so they can ensure that the project does not go over budget, or, if it starts to look like it must if it is to succeed, they can take steps to get more funding or to cut costs and reduce outgoing money.
Specialized account and budget planning software can help project managers create realistic budgets and easily access account information throughout the course of a project.
Project accounting includes legal contracts between a company and a customer
With many projects, there are committed customers before the product has been put into production. These contracts often consist of a customer committing to buying a certain minimum. These contracts are used to predict future revenues. The actual revenue that comes in is calculated later and compared to the projected to see if revenue exceeds expectations.
Steps for creating a budget
Creating a budget can take some time. Approaching it one step at a time saves going back and revising more than necessary.
- Look at comparable projects
While your project may be unique, analyze another project with at least a few similarities to yours for information that will help with your budget. If you are designing a competing product, then looking at your competition makes sense. You can learn from their success and mistakes. While some information is not going to be available to you, there is often a lot that is.
Managers should always look back on past projects within the company they are creating the budget for as well. Taking note of past mistakes and how they could have been avoided is extremely useful and can save a lot of money on any future projects.
- Consult with multiple experts
It is important to include the talent at a company when planning out a budget. If anyone has experience working on similar projects or some level of unique expertise, then they may be very helpful when it comes to designing a reasonable budget. There is something to be said for consulting with others outside your company as well. Experts in specific areas can help point out things that a project manager might overlook when planning a budget, especially for a complicated or long-term project.
- Have experts look over the first draft of a budget
No one person should be in charge of making sure a budget looks good enough to be finalized. Budgets need to be analyzed by many experts at a company or even by trusted collaborators outside of a company. This prevents costly mistakes and encourages success.
The principles of accounting for managers
Metrics must be used to plan out accounting. Here are a few practical examples of metrics engineers can use.
- Be realistic about the total cost of the project
Projected costs are great in the beginning. The goal is not to go beyond that cost; as so many managers learn, unforeseen costs often arise. For example, look at what happened during COVID-19. Supply chain disruptions and a lack of health workers led to some raw materials and goods not being manufactured for quite some time. Disruptions or finding an alternative source of a key component can lead to increased project costs. When accounting for a project, it is essential to always use the real cost to date and not stick to the projected final.
- Make sure revenues and expenses match
Monitoring a project and catching any inconsistencies is important. Tracking when an expense occurs and how and when it is balanced by revenue is essential. How long did it take to get a return on the expense? If there is a loss, is there a way to recoup it in another area of the budget?
- Accounting records need to be extremely detailed
As a project manager, you must ensure that absolutely everything is recorded so there can be full transparency when answering to investors, boards, and clients. Projects can go on for a long time, and with so many people involved, everyone must keep immaculate records and documentation. This can save a lot of time if a stakeholder raises a concern about the project. Accounting practices at businesses are scrutinized when it comes to end-of-year taxes, so there is still more reason to make sure that records are clear and easy to understand.
- Realistic estimates of long-term costs and revenue are essential
In the interests of full transparency, it is important to be realistic when accounting for long-term cost and profit projections. This is considered a good-faith estimate. That being said, it is typically better to be slightly conservative in any estimation. Coming in too far under revenue projections looks bad and doesn’t encourage faith in the project’s actual long-term success.
- Be clear about liabilities and responsibilities
Honesty regarding any potential future costs is critical to accounting. Be clear about any liabilities if something happens that means products cannot be delivered, or if there is any breach of contract that occurs throughout the course of a project. While these costs are not likely to occur, it is important to acknowledge what they are in case something unforeseen happens. These costs may have to be absorbed by stakeholders to bring a project to an end so they need to be aware of potential risks.
- Monitor all financial processes and ensure legal regulations are being followed
Regular monitoring of all transactions and record keeping is essential. Not only does this ensure legal and industry regulations are followed, but it also gives project managers a chance to make adjustments to spending to stay within budget. For example, maybe one aspect of a project ran over the projected cost but another part may be completed under budget, so the sheets balance out.
- Plan how to allocate left over funds
Sometimes a project comes in well under budget. It is a good idea to plan for how excess funds should be allocated if this occurs. There may be other projects in action, and it makes sense to roll them over into one of those. Other companies may want to reserve excess funds for marketing the new product. Whatever the plan, it is important to be clear and document how these funds are to be used in advance so that stakeholders are aware from the beginning of the project.
General tips for accounting and budgeting
Project managers need to be particularly careful when planning budgets. Here are some general tips to ensure success and reduce mistakes.
- Allow adequate time for budget planning
Rushing through a budget plan is simply not a good idea. There are too many details in a good plan, and it is easy to overlook something important if adequate time is not allowed. On the other hand, some budgets are less complicated and may be able to be completed faster than you anticipate. As long as you are sure that steps are taken to thoroughly check budgets for problems throughout the process, your project should proceed as planned.
- Make sure you get input from all the important stakeholders
It is important to establish who in the hierarchy of a company and its conglomerates needs to be involved in budget planning. Leaving out key players is not a mistake project managers want to make. For starters, it doesn’t give a good first impression or inspire confidence in the manager to take on a serious project. In addition, a budget may have to be severely reworked if some stakeholders are left out of the initial planning stage, thus costing everyone time and money.
- Be realistic about any market-related problems
COVID-19 continues to have an impact on the speed at which business is done. Shortages of raw materials, labor, and shipping delays are still challenges that businesses face when trying to bring new products onto the market or increase the production of in-demand items. Increased production costs that send projects over budget are more common because a company wishing to continue development and production is often forced to acquire raw materials or labor at an increased cost due to overwhelming worldwide demand.
- Be willing to admit when there is a problem
Being in denial when a problem presents itself can lead to more serious problems. You might have worked hard on a budget but still find some serious issues. Look at this as a good thing. Finding problems in the early stages and acknowledging them shows that you are on top of things and not letting mistakes slip through that can derail a product from launching successfully.
- Good project management and accounting skills increase the employability of engineers
If you work as an engineer or scientist and want to advance your career, you should consider moving into a management position. An online master’s in engineering management is an excellent way to gain the skills and credentials you need to take on a variety of project management roles at your current place of employment or in another industry altogether. This course is specifically aimed at experienced engineering and STEM professionals. The course itself combines engineering and management skills.
- Project management allows engineers to be in charge
While accounting and budgeting may not be a favorite aspect of any project, designing and managing entire projects puts an engineer on the cutting edge of innovation at companies. This means having a major influence on the direction of a company. Proving yourself on a single project can set your career up for an extremely high level of success in the years to come.
- Management skills and engineers with advanced skills are in demand
Companies need good managers and engineers to keep up with their competition. When it comes to startup companies, the best way to increase the odds of success is to employ a project manager to make sure things go smoothly and come in within budgeted costs. All this means increased job security and great flexibility in where and for whom an engineer works.
Conclusion
Project managers do not have it easy when it comes to creating budgets. On large projects, there are many stakeholders and a lot of input from different experts. However, it is important that budget and accounting planning are given due diligence. A good budget can help attract more investors and customers, which are critical to the overall success of a project.
Project managers face significant challenges due to economic conditions throughout the world. Hopefully, over the next year or two, the COVID-19 pandemic will cease to greatly impact economic activity.
