Factors that define a project’s budget
Table of Contents
Efficient business management.
Every project has objectives to reach the desired end-goal, the aim in business is to solve a problem for a client in order to generate a sustainable profit. Generating a budget can be the effect. Timescale, on the other hand, can be the cause. Cause and effect is the relationship between two circumstances when an action generates a reaction. This fundamental is called ‘Causation’.
There are three levels of causation:
Absolute Causality: The cause is necessary and sufficient to bring about the effect. As an example, there may be a strong causal relationship between reducing retail prices and increasing retail sales.
Conditional Causality: The cause is necessary, but not sufficient to bring about an effect. As an example, there may be a strong correlation between advertising spending levels and retail sales. Although, there may be occasions when increased advertising spending may result in reduced retail sales, and there may be times when sales increase when a brand lacks advertising support.
Contributory Causality: The cause is neither necessary nor sufficient to bring about the effect. As an example, there may be a contribution effect from advertising spending on retail sales.
Variables.
Variables are any characteristics that create value from the solutions that you provide to your clients. In a project, one variable can affect another one that can produce an effect. Variables in a project, which have cause-and-effect relationships, are called:
Independent variable: This is the cause. This value is separate from other variables in your study. An example would be ‘timescale’.
Dependent variable: This is the effect. This value depends on changes in the independent variable. An example would be ‘budget’.
Control variable: This is the influence over the effect. This can remain constant and is not of interest in the project. An example would be ‘quality control’.
Professionalism.
By understanding the level of causation and the variables involved in a project then the more likely both you and your client can be in agreement. As a business owner, you should not expect your client to care about the project’s quoted budget. But rather, there should be a balance in mutual respect, agreement and arrangement between all parties involved.
Care: Feeling a concern or interest, attaching importance to something.
Mutual: A feeling or action that is experienced or performed by each of two or more individuals towards the other or others.
Respect: Having due regard for an individual’s feelings, wishes, or rights.
Conduct.
You will have expenses to keep track of within your business and therefore the price of your products/services are representative of the expenses and value combined. Equilibrium is the state in which market supply and demand balance each other, resulting in price stabilisation. Generally, an over-supply of products/services causes prices to decrease, which results in higher demand. Meanwhile, an under-supply or shortage causes prices to increase resulting in less demand.
You decide how you wish your brand to conduct business with your clients and what mode of income generation you wish to implement. This means, deciding to charge your clients to break even, generate a minimum profit, charge median industry rates or sell value in quality and luxury.
Before identifying factors that can define a project’s budget, we need to take a quick look at a few common terminologies in regard to business finance management. This glossary can assist you in understanding the responsibility that there is when managing a business.
Accounts Payable: Also known as AP, this is the obligation that a business has to pay off debts owed to lenders, suppliers, and creditors.
Accounts Receivable: Also known as AR, this is the money owed to a business by the clients for the products/services rendered. The client can have a legal obligation to pay the money for the debt as the accounts can be labelled as assets.
Asset: Any items owned by a business that has value, including cash on hand, accounts receivable, buildings, equipment, inventory, and anything else that can generate money.
Balance Sheet: A report that contains the essential information in regards to the financial health of a business and provides an overview of the business’s net worth at a particular moment in time. It summarises the business assets and liabilities.
Bookkeeping: A method of accounting that involves the timely recording of all financial transactions for the business.
Expense: This is the cost incurred in the day-to-day operations of a business and is a part of the income statement. This can include raw materials, manufacturing expenses, labour costs, marketing, and transportation of goods are all included in expenses.
Sales: A transaction between two or more parties in which the client receives tangible or intangible goods, services, or assets in exchange for money.
Income: A net profit or loss, which is calculated as its revenue from all sources minus the costs of doing business.
Fixed Capital: Also known as capital, this represents the overall long-term wealth of a business through its cash accounts, assets, and investments. This can be tangible, like durable goods, buildings, and equipment, or intangible such as intellectual property.
Working Capital: Opposite to Fixed Capital, this represents the financial resources necessary for maintaining the day-to-day business operations. This involves the money on hand or assets that can be converted to cash quickly.
Gross Profit: A finance term resulting from the income minus expenses (Gross Profit = Income - Expenses).
Income Statement: Also known as a profit and loss statement, this indicates a business’s bottom line by reporting how much money has been generated and expended over a period of time. The indication could be a net gain or a net loss.
Liability: The legal obligation that a business must repay or otherwise settle a debt. These are considered as current, payable within one year or less, or long-term, payable after one year. A business’s accounts payable, wages, taxes, and accrued expenses are all considered liabilities.
Bankruptcy: When a business experience severe financial challenges, there can be a plan for reducing and repaying off debts overtime or an opportunity to completely eliminate the majority of the outstanding debts. This can affect a business’s credit score.
Business Plan: A document that demonstrates how a business will be established, research in the target market, application of the business’s products/services, competitor checks, the route for financial growth, along with the financial, operational, and marketing end-goals.
Net Worth: A determination of a business’s total value by the total current assets minus the total liabilities (Net Worth = Assets – Liabilities).
With all of the previous information in mind, what factors can define a project’s budget?
Planning and executing a project’s budget.
Regardless of the industry and the scale of the project, forecasting potential expenses and profits are crucial for successful project delivery. By planning and evaluating the budget of the entire project, the projection of the expenses will improve and the higher the chance that a project can be successfully completed on budget and on time.
Risks.
Keep in mind that your products/services are an investment for your client’s business. Having said that, everything in life contains a level of risk. Investing money into any product/service will yield a level of risk, whether large or small, and you may not receive any value in return if the investment fails. Incurring a level of risk should yield a return that compensates you for potential losses. A brand can experience two types of risks:
Business Risk: Refers to the possibility of generating inadequate profits or leading to failure due to uncertainties.
Financial Risk: Relates to the use of financial leverage and debt financing.
There is a concept called ‘risk-reward’ and this stipulates that the higher the risk of an investment, the higher the possible return. On the contrary, the lower the risk of an investment, the lower the potential return. By determining the appropriate risk level of a project, the end-goals should justify the budget.
Expenses.
There are two categories of expenses that a business owner must manage:
Direct expenses: Expenses directly associated with a cost object, any item for which costs are measured, including products, services, employees, and even entire departments.
Indirect expenses: Expenses indirectly associated with operating a business as a whole and cannot be traced back to a specific cost object.
The types of expenses that need to be taken into consideration and require budgeting involve:
Labour costs: This expense covers the salaries, bonuses and benefits of employees working on a project, including the business owner or 3rd party service providers. This can be incurred on a daily, weekly or monthly basis.
Project equipment and materials costs: This expense covers all materials used for the production or manufacturing of commodities and specific items/tools required for the execution of the project.
Project management software costs: This expense covers necessary software licenses for project management.
Travel costs: This expense covers travelling for performing project work or arranging client meetings.
General and administrative costs: This expense covers different administrative procedures, relating to rent, taxes, utilities and office supplies may be considered as administrative or general expenses.
Office supplies and equipment costs: This expense covers all the items and tools that are required for ensuring optimal working conditions and the effective performance of all employees.
Project’s budget.
Once the expenses have been considered and an estimation calculated, do not forget to include the gross profit margin. There is a 3-phase budgeting process that can allow you to better identify and process a project’s budget. This involves:
Calculating anticipated costs: Calculate a project budget that is accurate with anticipated expenses. For objectives to be completed and to reach the end-goal, specific amounts of the total budget will need to be assigned to the two categories of expenses.
Preparing for a budget change: The initial budget involves estimated potential costs that impact the project as a whole. Preparing for unforeseen changes in the project budget allows for determining potential problems that might hinder the project’s end-goal.
Managing and monitoring budget: Regularly managing and monitoring the project’s progress ensures that you have complete control over your project’s budget. If issues are noticed during the project, the most important thing is to act accordingly and course-correct.
Benefits and ROI.
The budget of your client’s project can be expressed in terms of expected benefits. The success of a project can occur when the end-goal adds value to the client’s business. A method to calculate the estimated Project Budget involves the Project Benefits for the client divided by each return on investment (ROI) on each invested currency of 50% (Project Budget = Project Benefits / 1.5). Determine a project budget with this calculator.
As an example, when your expected Project Benefits are €4,450.00 and this is divided by the ROI of 1.5, then the Project Budget will equal €2,966.67 (€4,450.00 / 1.5 = €2,966.67). When the expected Project Benefits reduce then the Project Budget also decreases. This is a simple equation to identify an estimated budget for a project.
If you can or cannot invest money directly to a project then this is a financing and risk question that needs to be answered, rather than a budget question. You may be able to secure a loan for some of your projects, thus increasing risk and reducing ROI because of paid interest.
If the project does or does not have a sustainable budget then this is a cost estimation and risk question, rather than a budget question. Avoid confusing cost estimations with the budget.
If you are willing or not willing to invest money in a project then this is a prioritisation question, rather than a budget question.
Project proposal.
A professional-looking, intuitive and informational project proposal can assist in persuading a potential client to select your solution other than your competitors. Although, you may have to manage day-to-day occurrences such as:
Projects going straight to your competitors.
Clients ghosting you.
Having to haggle over your price.
There is no one way of presenting a project proposal. Every business has a unique niche with a bespoke target market. Creating a template project proposal assists in speeding up the process of delegating with potential clients. But, there is a delicate balance in crafting a project proposal. Understanding what to include and what to leave out allows you to justify charging more, close more leads, and give clients full clarity into your process.
Communication, transparency and survival.
Under-promising and over-delivering a solution for a problem can generate success for your business. Meeting the expectation of your client rather than fixating on the project’s budget sounds good. Although, the caveat is that businesses that go too far above and beyond the scope of work risk damaging the bottom line. This is known as scope creep.
Projects that go the extra mile can increase the budget very quickly and if your project extends beyond the agreed budget then your business may suffer from reduced gross profit margins.
One way to combat scope creep is to develop a process to calculate the budget for the amount of work provided. An accurate method, that ProjektID has developed, is to determine the Project Scale by identifying all of the objectives that need to be reached, we’ll call this the Project Scope, and how stringent the route in completing the work will be, we’ll call this the Project complexity. Complexity defines how simple or complex and easy or hard a project can be. Read our article, The process of solving a problem, for more details.
Therefore a Project Scale is equal to the Project Scope multiplied by the Project Complexity (Project Scale = Project Scope * Project Complexity). This value is then multiplied by each base charge of every single objective in the project.
Examples of a set of objectives that the ProjektID’s website construct service can have include:
Squarespace Account, Legal & Tax Setup.
General Data Protection Regulation (GDPR) Compliance & Practice.
Primary Website Design & Advanced Setup (Optimised UI & UX).
Mobile Functionality & Responsiveness.
Alternate Website Wireframe.
Advanced Copywriting.
Content Development.
General & Local SEO (SERP).
Implementing Page Title & Description (SEO).
Call To Action (CTA).
Conversion Optimisation (CRO).
Lead Capture Methodology (CRO).
Website Guidelines Dossier.
Web Page Count: 6 to 20 Site-Pages.
Product Page Count: 1 to 150 Product-Pages.
Ongoing consultation & Advice Throughout Project.
1 Hour Website Builder Training Session.
Pre-Launch Checklist.
GDPR Checklist.
Legal Requirements Regulating (TOS, Privacy Policy & Cookie Policy).
EU Cookie Notification System.
Website & Brand Identity Manual.
Create your own method for accurately identifying the budget of your client’s project. Keep in mind, that the budget of a project should be allowed to adapt depending on the change of the Project Scale.
Communication.
Even though you can develop a method for calculating the budget of a project, scope creep can still arise if you have multiple departments within your business which are competing or have different incentives and attitudes between all of the members of staff involved. This may not be malicious behaviour, but rather the departments may not be aware of the scale of the project due to a lack of communication.
During the sales pitch of a project, it can be good to energise the client by demonstrating the knowledge, skills and experience that you have. However, keep in check that you maintain a firm and direct dialogue with your client and this reflects setting realistic goals and deadlines from the get-go.
Transparency.
During the quoting process, some clients who wish to utilise your business solutions may have a gap in knowledge and understanding of the intricacies in the work that you do. Therefore, it can be important to explain in detail what you will be doing, which is not excessive but completely necessary. Some other clients may have a level of knowledge and understanding of your industry and the work that you perform. However, they may just wish to use a 3rd party services provider to help their business upscale.
Serving your clients to the best of your ability is necessary and some of your clients will be grateful for the effort. Although, your abilities could be dampened if the project gets out of control. It is an unfortunate circumstance that scope creep can decimate all of your hard work and strangle your business from the profit it needs to be sustainable.
With the two above cases in mind, being as clear and honest with the client in regards to the scale of the project, the process of the work and the budget involved can allow you to be seen as a trustworthy professional and avoid scope creep.
Survival.
The business-client relationship can be strained if scope creep is not managed. When reaching and proceeding to each phase in the project, always keep track of the budget. Identify if the end-goal is obtainable in the current project format and is it still profitable. Monitoring, forecasting and predicting the budget throughout a project can allow you to course correct.
Keeping the client involved throughout all phases of a project not only engages them with the development of the work but also addresses if the project is going beyond its expected limits. Initialising a conversation with your client can allow you to suggest more appropriate and budget-friendly alternatives. Potentially, your client could increase the project’s budget to accommodate reaching the desired end-goal.
Utilising effective tools within your business can make it possible to track actual achievements against the planned objectives. Also, a well-developed management system should include communication, payment processing, database and document generating subsystems. Thus, making it easier to manage a project and not to be blindsided by scope creep. The ProjektID data system service can assist your business in tracking work progression against projections, enabling you to catch problems as they arise and adjust the plan accordingly before a project splinters far beyond the client’s initial expectations.
Effective business deployment.
Remember that your business provides value to your clients. That value has a price. That price also includes business expenses and profits. Simple.
Whatever the Project Scale is, direct and indirect expenditures need to be monitored and analysed. A good budget can be accurately deduced when you interview your client in the initial meeting and truly understand the problems that need solving, defining objectives and knowing the end-goal. Knowing the core concepts of business and finance can allow you to develop a process in handling clients, generating a project proposal and calculating a budget to reach the desired end-goal within a project. The more accurate the budget, the bigger the possibility to avoid unwanted alterations.
By understanding the level of causation and the variables involved in a project then the more likely both you and your client can be in agreement. This, along with the conduct you perform in your business, communicating the potential risks & rewards and managing scope creep can allow you the optimise expenses and control profits that define a project’s stability.
Your knowledge, skills and experience should allow you to prepare yourself for a possible change of the budget, and in the end to manage and monitor the budget while your project is in progress.
Before we conclude this article, just some last words of advice:
Reduce or completely prevent negotiation of the budget and try to charge what benefits the client and improves the ROI of their business and demonstrate this with a professional perfect proposal.
Do not guesstimate the budget of the project, develop a system to allow you to accurately calculate budgets.
Spend your valuable time and effort wisely and identify if the client is suitable for your business.
Utilise a branded project proposal template to engage in a timely manner with the potential lead.
The Futur (thefutur.com) - Roleplay session about responding to a client’s price assumption.
