Importance of Budget Management for a Small Business.

Budget Planning

Budget planning is typically a planning process that shows the organization’s objectives and an outlay of how the management intends to get the resources and how they will use the resources to ensure that their objectives are attained. Here is an interesting article of how to set up and maintain a budget for your small business.

As a small business owner, you need to manage your budget to execute the entire business properly and stay on track. Let’s look at some of the important tactics of budget management. Read about why project management is crucial for small businesses here.

Why is Budget Management important for any business?

Helps you to meet your customer expectation

One thing that budget management enables the business owner to do is to deliver on time as per the customer standards in the best possible budget plan. You may have noticed that business tasks are somehow interwoven, and delay automatically affects the next activity.

Eliminates unwanted costs

Unnecessary costs are some of the culprits that lead to high overall costs in the business. Budget management will help you to only spend on vital tasks and areas of the business.

You allocate the right amount to each task.

A miscalculation or poor budgeting can result in having one task taking more money, yet it needed just a smaller allocation. Budget planning will help you allocate the right amount to a task according to its importance. 

Saves you from uncertainty

Although uncertainties usually occur in any business, you will have set aside some money for miscellaneous expenditure when you have planned your budget correctly.

Reduces the amount of time used – with all activities running on their budget and no failure to reduce the amount used in each task. 

In managing your budget, you need proper planning for outflows that are likely to occur and set the money. You also need to set aside some money for contingency occurrence. For those scope changes during the task completion, there should be some management reserves. 

Cost Estimating

An essential part of budget management is cost estimation and management. Cost management includes tracking and consequently managing variances found in the already planned expenditures. As a business owner, you should have detailed cost estimates. Cost is one of the three project constraints that need to be managed for the project to succeed.

Cost Estimation Methods

Only do estimates for what you are expecting in your business and meet the estimated requirements. 

There is three major cost estimating methods:

  • Analogous 
  • Parametric 
  • Bottom-up 

Analogous Estimates

This involves getting a similar task and assuming that your real operational task will be the same. The more estimator learns and becomes experienced in this cloned project, the better they will do with the real tasks. 

Darnell-Preston Complexity Index (DPCI) can be used in your benchmarking. This is a project management technique that is designed and developed to influence project completion.

The DPCI was developed around four assumptions:

  1. All projects are unique.
  2. Projects have common characteristics.
  3. These characteristics can be grouped to create a project profile.
  4. There is an optimum execution approach for each project profile and an optimum set of skills and experience for the business, reused.

Parametric Estimates

This approach is where we can use the numbers to do the estimates in the business.

Bottom-up estimating

This estimation method is more complex and requires more time, but it is considered the most accurate for any small business. You do estimates for each task and bring them together. Be careful to consider the overhead and task integration efforts that may occur in addition to the work defined in the breakdown structure.

Indices for Managing the progress using project management

You should know that your proper budget management will lead to smooth overall progress in any small business type. To ensure these two factors are in line, some indices should help you, which include:

  • Budgeted Cost of Work Scheduled (BCWS)
  • Planned Value (PV)
  • Earned Value (EV)
  • Actual Cost (AC)
  • Budget at Completion (BAC)
  • Estimated Final Project Cost (EAC) = ETC+AC
  • Estimated Cost to Complete the Project (ETC) – depends on your project.
  • Cost of Performance Index (CPI) = EV/AC
  • Schedule Performance Index (SPI) = EV/PV
  • Cost Variance (CV) = EV – AC
  • Scheduled Variance (SV) = EV – PV 

The right value for SV, CV, SPI, and CPI should be zero, which shows you are on time, on the plan, on schedule, and budget, respectively. If the CPI or CV value is positive, you have an under budget while less than one means you are spending less than you predicted. 

An SPI and an SV value less than one means the project is behind schedule while greater than one indicates you are ahead of your schedule. 

Budget management concepts have been around for a few decades now, and its importance has only increased over time. Every Company, be it big or small, get involved in new undertakings now and then. This can prove overwhelming, which may result in the loss of direction and, ultimately, chaos. By applying sound management practices, companies can ensure that their undertakings are delivered on time, within the cost budget, and specified. Read about why project management is crucial for small businesses here.

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