Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability

Chapter 7. Creating the Project Budget

Introduction

Consider the statement: Projects do not happen in a vacuum. This certainly is a truism. However, in our previous book, The Essentials of Strategic Project Management, we pointed out that many companies consider projects and project management as if they exist in a vacuum.^[1] Companies often tell us: “We need project management training.” The attitude conveyed by that statement shows that projects and project management are considered to exist in a vacuum.

Any company can improve the manner in which projects are executed to become more efficient. However, no matter how efficient a project team may be, if the project being executed is not in alignment with the company’s financial goals and strategy, there is a limit to how the company will profit from the project.

A project’s budget must be based on the company’s strategy and financial goals. These goals are reflected by the company’s budget, which may be represented by a number of different documents, including pro forma or projected revenue and expense, cash flow, and balance sheets. The project budget that is based on the company’s financial planning has a much greater chance of contributing to the company’s success. In this chapter, we will first look at the process of creating a company’s operating budget. Later we will move on to project budgets and how they relate to the company’s operating budget.

To create the company’s operating budget, we must bring together and synthesize ...