Project Budget Management 101: Manage Your Finances Successfully
The three essential activities for successful project management are resource planning, project scheduling, and project budget management.
This guide will discuss everything you need to know about budget management. Keep reading to learn more about budgeting challenges, best practices, and the top software solutions available.
Key Takeaways
- Efficient project budget management includes implementing robust change and risk management to improve project deliverables and overall agency finances.
- Various management methods can be applied depending on your agency and project type. These include traditional vs agile budgeting, bottom-up vs top-down estimating, and value-based budgeting.
- Common project budgeting mistakes and challenges include ineffective scope management, inaccurate estimates due to lack of project data, and minimizing the importance of communication and transparency between project stakeholders.
- Project budgeting software can help you make your project budgeting more efficient with real-time data and automated processes. Consider all-in-one tools to reduce IT overhead and integrate your workflows.
Understanding Project Budget Management
Project budget management is a crucial part of project management. It includes careful planning and estimation, efficient resource allocation, and continuous management throughout the project life cycle.
Research shows that only 36% of organizations are likely to deliver projects within budget (PM Survey 2019). What are some of the main challenges associated with successful project budget management, and how can you try to address them?
- Scope Creep: Scope creep is one of the main causes of budget overruns and failed project delivery in professional service agencies. Though there is no way to prevent changes to scope fully, you should ensure that you have the right systems to forecast potential challenges and their results. This is also known as scope management.
- Inaccurate Estimations: As with maintaining project scope, you’re unlikely to achieve perfection when estimating tasks. However, to come as close as possible, referencing reports that compare estimated and actual time can be invaluable. Additionally, consider implementing a slack period for every estimation — over-delivering is better than under-delivering.
- Communication Gaps: Poor stakeholder communication can drive up project deadlines and cause unexpected costs. This includes inefficient feedback processes with clients and information gaps in internal teams. To address this, you can set up best practices for progress updates, such as gathering all task communication in one place.
STREAMLINE YOUR COLLABORATION WITH PRODUCTIVE’S PROJECT VIEWS AND TASK MANAGEMENT
Efficient budget management can reduce costs, build agency-client trust, and ensure better planning and forecasting for future projects.
What Are the Different Methods of Project Budget Management?
We can distinguish between multiple methods for managing budgets, which can be suitable depending on your industry, project type, and team composition.
We’ll review some of their features, benefits, and downsides in the below sections.
Traditional vs. Agile Budgeting
Traditionally, income and costs are usually determined annually, at the beginning of the fiscal year. This means budgeting is more rigid, with less opportunity to react to sudden internal or external changes.
Agile budgeting, on the other hand, is an interactive process that assigns resources in smaller increments. It supports collaboration and separates the purposes of budgeting into three distinct processes, all of which are handled flexibly: setting targets, forecasting key performance indicators, resource allocation, and cost management (learn more about cost efficiency vs cost effectiveness).
Top-Down Budgeting
Top-down budgeting uses experiences from similar past projects and breaks up the estimating process from the whole to the granular elements of the project. In practice, this would mean that the lead manager estimates the overall project cost, focusing on major tasks, then gives the estimates to managers handling specific teams, and so on.
The benefits of this process are:
- Overall budget costs can be estimated with more accuracy
- Errors in estimation for individual tasks usually don’t cause many issues
- Overlooking smaller tasks also doesn’t impact the budget significantly
Bottom-Up Budgeting
In bottom-up estimating, the granular level of the project is estimated first, not by managers but by team members – for example, a designer would provide hours for how long it takes to create a design and a developer would then estimate the time for coding. The overall project costs are estimated by considering the costs of resources and indirect costs such as administrative costs, contingencies, etc.
The benefits of the bottom-up method are:
- More accurate estimating of individual tasks
- Including all members of the project team can increase employee engagement
- Can simplify the process by diving it between multiple people
Value-Based Budgeting
Value-based budgeting considers the potential value that investments or expenses may bring. It addresses the following main questions:
- Does the product or service provide value to customers, employees, or other key parties?
- Is the value provided by the product or service greater than its expense? If not, are there alternative justifications for the incurred cost?
The benefits of value-based budgeting are that it encourages strategic thinking and focuses on the end result, enabling innovation and growth. However, it might be challenging to implement in professional service industries, where the most valuable resources are intangible — employees and the skills they provide. Additionally, value propositions can be subjective, as they can depend on individual judgment.
How Can I Create a Project Budget?
From defining project scope and identifying tasks to selecting the most suitable budgeting methodology, a couple of key processes provide a solid foundation for effective budget management. These include:
1. Project Scope and Objectives: Clearly outline what the project aims to achieve and set boundaries for what is included in the scope and what is not.
2. Tasks and Activities: Break down the project into individual project activities and tasks. This breakdown, often represented in a Work Breakdown Structure (WBS), helps comprehend all the smaller constituents that make up the overall budget.
3. Budgeting Methodology: Find the best way to approach your budgeting depending on project type: from top-down, bottom-up, value-based budgeting to a hybrid of different strategies.
4. Stakeholder Approval: Present the budget plan to stakeholders for approval to ensure it aligns with the desired outcomes.
5. Monitoring and Iteration: Continuously monitor the budget throughout the project life cycle and update it to reflect unforeseen internal or external changes.
Learn more about optimizing your project management budgeting:
What are Some Common Budget Management Mistakes?
Some common budget management mistakes include underestimating costs, ignoring risk assessments, and failing to update the budget.
Underestimating costs can happen when data from previous projects isn’t being collected or analyzed – in particular, consider the importance of reports such as estimated vs actual hours.
A similar proposal from the past might have said “this is going to take us 100 hours”, but the reality might have been 60 or 160 hours. That reality is what’s going to drive the new proposal or the lack of even trying for that business. So if the utilization for that project was 160% and we know we can’t get 160% of the price for the project again for the next client, then there’s no reason to step into that deal.
Learn how Productive helps companies compare profits and drive insights across multiple projects.
It can also be caused by a desire to close a deal with the client at all costs — but be wary of under-pricing your services. It can set a bad precedent for the future, and even make the client think that your services are less valuable (learn more about creative agency pricing and more).
When it comes to risk assessment and budget updating, both can happen due to a lack of real-time data, as well as time and resource constraints. Another possible factor in project budget mistakes is inadequate communication with the project team and stakeholders.
What are Some Tips for Managing a Tight Project Budget?
Here are some project financial management best practices:
- Project Prioritization: According to PMI, projects that are aligned with business strategy are 57% more likely to succeed, 50% more likely to be finished on time, and 45% more likely to stay on budget. This is particularly important in a multi-project environment, where it’s largely impossible to put the same amount of work into every project. Consider the Pareto Principle, where 80% of value comes from 20% of work, and apply it accordingly to your capacity planning.
- Cost-saving Strategies: Consider ways to save on costs without affecting your quality. This usually includes reassessing your expenses and finding areas that you can scale down without negatively affecting your operations. For example, decreasing travel expenses, or switching your workflows to an all-in-one management tool to cut down on IT overhead.
- Continuous Review: By regularly analyzing the budget and updating forecasts, project managers can anticipate and mitigate potential financial issues before they escalate into major problems. This proactive approach allows for timely adjustments in strategy or resource allocation, helping to maintain control over costs. Using cost variance analysis is one strategy that can help identify and resolve budgeting issues before they occur.
How Can I Communicate Budget Changes to Stakeholders?
Client transparency is one of the most important factors of successful project delivery. Yet, according to surveys, only 56% of clients believe they have an honest and transparent relationship with their agencies (Havas). Without good communication, the likelihood of getting repeat business and good word of mouth significantly decreases.
I think that in project management there’s a tendency to focus solely on profitability, but it’s inevitable that projects will go over budget, and that’s ok. However, it’s important to have transparency on where that stands, and Productive gives us that visibility.
Here are our three tips for ensuring more effective collaboration:
1. Establishing stakeholders: A project manager in a professional service agency will work with multiple stakeholders — ensuring stakeholder buy-in, especially across senior management, is necessary for easier resource reallocation and better project delivery. Additionally, establish the primary point of contact with the client to speed up the feedback process. This is necessary to help the project manager get the resources and support they need to manage their project successfully.
2. Ensuring continuous contact: The client should regularly monitor the project, ideally through weekly meetings. Even if the client doesn’t request regular reports, the agency project manager should encourage them regardless. Yet, surveys show that only 15% of agencies send weekly reports (AgencyAnalytics). Regular feedback benefits both parties by fostering urgency, allowing early resource requests, predicting and avoiding potential roadblocks, and promoting collaboration.
PRODUCTIVE GIVES YOU IN-DEPTH INSIGHTS INTO YOUR FINANCIALS ACROSS MULTIPLE PROJECTS AND CLIENTS
3. Considering goals: When it comes to drafting the terms of the contract, the manager needs to consider potential risks in advance. Clients tend to underestimate the time, budget, and effort needed for project tasks, so accounting for slack at the outset is helpful for further communication. It can help avoid situations where clients are surprised or disappointed by actual project progress and facilitate requests for additional resources or funding.
Learn more about the end-to-end agency project management process.
How Can I Track Project Expenses?
The best way to track project expenses is to utilize a software solution that streamlines repetitive processes and helps deliver accurate data. Some key features to consider are: budgeting, project billing, project resource planning and forecasting, and essential project management capabilities with billable hours tracking.
According to recent research, only 5% of agencies are largely dependent on spreadsheets, with a vast majority (52%) using disparate tools with some extent of integration, and only 14% utilize an integrated platform that enables real-time analysis (SoDa & Productive).
Using an integrated tool to support your budget management can:
- Streamline Processes: With comprehensive software, you can support the entire project life cycle on one platform, from winning deals to billing your clients.
- Enhance Collaboration: Cross-functional teams, in particular, can profit from using an integrated platform, as it allows simpler knowledge sharing and decision-making.
- Centralize Data: All-in-one tools consolidate all project-related data in one place, which enhances accessibility and data accuracy.
We used to have a project management tool, a time tracking tool, a support tool, a way we handled opportunities and sales-driven processes. Those were all separate tools that we had, and it wasn’t good. It also meant that all that data was being lost every time we switched between tools, or we had to find a way to normalize the data between them. And now, the fact that it’s all in one, it’s really a game changer.
What Are Some Tools That Can Help Me Manage My Project Budget?
Some different types of tools that can be used to manage your budgets are:
- All-in-one tools centralize all project management and budgeting processes, enabling seamless integration of budget planning, tracking, and reporting within a single platform.
- Financial management tools are specialized software designed to streamline financial health and budgeting, with minimal support for other agency operations such as project or task management.
- Billable hours trackers help manage contracted hours vs actual hours to support accurate client billing and revenue recognition.
Let’s look at the best options from each category and compare their benefits, downsides, and customer reviews.
1. Productive – The Best All-in-one Agency Management Software for Effective Budgeting
Productive is a comprehensive agency management software for agencies of all shapes and sizes. It’s tailored to support your daily operations with various features, from time tracking and project management to extensive resource planning and budgeting.
productive helps minimize costs by balancing your agency’S resources
Key features include:
- Time Tracking: Productive helps manage billable and non-billable hours with its integrated time management. Options include an integrated timer that can be started from tasks or desktop, retroactive entry, and automatic creation based on booked employee hours. Use time approvals to decide whether hours are billable or not.
- Financial Management: Productive helps you get full control of your project budgets, including hourly, fixed, retainer, or hybrid. Forecast your overruns, monitor budget burn, and check your profitability in real time with Productive’s Profitability view. Set up automated warnings for spending to make sure you’re always on track.
- Billing & Purchase Orders: Productive’s budgeting supports client invoicing and expense management with purchase orders. Create and send brand-friendly invoices directly from the platform, and set up automatic payment notifications to ensure you’re paid on time. With purchase orders, you can manage external expenses and delivery dates.
- Reporting: Productive provides more than 50 agency-focused templates for simplified reporting. You can add specific parameters with custom fields and convert your numbers to easy-to-underst
Additional features include: Project Management, Resource Planning, Sales, Docs, Automations.
Integrations include: Xero, QuickBooks, HubSpot, Breathe, Zapier, Slack, Jira, and more.
Why Consider Productive as Your Project Budgeting Software?
Productive can be a great choice if you’re looking to optimize and streamline your budgets. Thanks to its integrated approach, you can standardize your workflows on one platform to get the full picture of your project and resources.
Thanks to its advanced reporting and financial forecasting, you can ensure that you’re making informed project decisions. Client communications are also simplified, as you don’t need to spend hours to create reports.
Finally, you can ensure continuity with previous financial practices thanks to Productive’s integrations with popular accounting tools, such as QuickBooks and Xero.
Because of the information that’s available now, we’re doing more because Management is looking at the information and dissecting it even further. “Why did those 10 projects make a 42% profit, and that one made 20%?” Before using Productive, we could never understand where differences in profit were coming from.
When to Consider Alternatives
If you’re looking for a specialized tool that supports one part of the project management budgeting process, Productive might not be your best solution. However, consider that investing in an all-in-one solution might be a more time and cost-effective solution in the long term.
Optimize Your Project Budget Management
With Productive, you can control your project budgets and make informed decisions thanks to forecasting and real-time project data.
2. Sage Intacct – A Complex Financial Management Tool
Sage Intacct is a financial management software from Sage Group, the leading provider of ERP for professional services and other industries. This includes construction, retail, healthcare, and more.
Key features include:
- Real-time financial reporting and analysis
- Streamlined bill entry and payment automation
- Streamlined internal communication with Sage Intacct Collaborate
- Security and compliance features
SOURCE: SAGE INTACCT
The Benefits & Downsides of Sage Intacct
Sage Intacct is a robust financial management solution, and it can be suitable for larger enterprises. However, as the tool is not geared towards professional services only, but a large variety of industries, you might find that not all of the features suit your workflows. Additionally, users frequently comment on Sage Intacct’s price point and learning curve. For a more streamlined and user-friendly option, an all-in-one tool might be better.
Learn more about Sage Intacct as one of the top BigTime competitors.
3. Toggl Track – A Streamlined Time Management Solution
Toggl Track is a specialized time tracking software for agencies that streamlines budgeting with accurate timesheets and simple-to-access time management data.
Key features include:
- Simple timesheet creation and exporting
- Project profitability tracking
- Exportable data for easy client invoicing
- Integrations with various productivity & project management tools
SOURCE: TOGGL TRACK
The Benefits & Downsides of Toggl Track
The biggest benefit of Toggl Track is its lower price point and simple user interface. This makes the tool a suitable choice for smaller teams and startups that are just starting to think about billable hours management and key agency metrics. However, Toggl Track lacks the advanced support that is necessary for teams with more complex projects and financial needs. Therefore, fast-growing agencies might quickly out-scale this solution.
How Can I Prevent Project Budget Overruns?
The key to preventing project budget overruns is to identify early warning signs such as frequent changes in project scope, delays in key deliverables, or escalating costs for certain tasks. These indicators require immediate attention to prevent minor issues from turning into significant problems.
Strategies for mitigating overruns include extensive initial budget planning and regular monitoring of expenses against the budget. Another tip is maintaining a contingency reserve:
It is common practice for project managers to ask for some percentage of the overall budget, such as 10%, to be used as contingency reserve.
Source: PMI
It’s crucial to consider and implement a change management process, as this is one of the primary causes of budget overruns. This involves evaluating the impact of any change request on the project’s budget and timeline and only approving those that are essential or add significant value.
This can be streamlined with project management software – for example, Productive’s Resource Planning lets project managers reallocate their resources in real time and check the impact on budget and profit margins.
ALLOCATE YOUR HUMAN RESOURCES WITH PRODUCTIVE’S REACTIVE RESOURCE PLAN
Using Project Management Budgeting to Improve Project Outcomes
Effective project budget management significantly enhances project outcomes by aligning financial resources with strategic goals. Insights on actual cost vs cost estimates can help you make better decisions for your agency’s financial health, address the weak points in your processes, and get accurate budget estimations.
We ended up terminating contracts with two of our oldest clients after only a few months of using Productive. We thought that we were at least at zero with them, or that we had some small earnings, but it turned out that we were losing money because the money they paid us did not cover salaries, fixed overhead per hour, and variable overhead per hour.
Good project budget management also ensures that your current and future engagements are more successful. Delivering higher quality project deliverables within the project estimate timeline leads to satisfied project stakeholders. This can help you renegotiate your hourly rate or gain new business opportunities from positive word of mouth.
The Best Practices for Project Budget Management
To summarize, effective managing of your project budget can help you improve current and future project performance, driving overall agency growth.
The primary best practice is ensuring frequent stakeholder communication to foster transparency and collaboration. Then, regular forecasting, budget review, and updating can ensure you’re never caught off guard. Allocating contingency funds can help your risk management efforts and promote proactivity.
Finally, leveraging software solutions as a tool can significantly enhance the efficiency and accuracy of these processes. To achieve this, book a demo with Productive, the all-in-one management software that drives project success.
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