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Normally at the start of the year for a department or the start of a project a budget baseline is established. This is the planned expenditures for the department or project and the actual spending is tracked against this baseline.
When to Use a Budget Baseline
Budget baselines should be used if costs must be controlled within a department or on a project. The Baseline is created at the beginning of the year or project and each month the actual spending is compared to the baseline to determine if management needs to take any action to change how the money is being spent.
- One of the purposes of budget baselines is to clearly communicate the intent by management on what money should be spent for and when it should be spent.
- A second purpose of the budget baseline is to have something with which to compare actual spending. If the actual spending is in alignment with the baseline then the financial objectives should be met. If the actual spending is not in alignment with the budget baseline, management must decide what to do about it.
- Budget baselines are used at three levels: the total business, a department and at the project level.
- The business level budget baseline is normally created for one calendar year at a time and is referred to as the operating plan or OpPlan.
- This baseline is often expressed using the planned Earning Statement, Balance Sheet, and Cash Flow statement for the business.
- The baselines are often divided into quarterly or even monthly increments and the actual quarter or monthly financial performance is compared to the plan.
- The department and project budget baselines are often components within the OpPlan.
- The department level budget baseline is often expressed in a spreadsheet format and shows the planned financial activity the department is responsible for.
- Each column represents a time period, such as a month.
- Each row represents a cost account such as travel, personnel, office supplies, or product sales.
- The estimated value for each transaction is placed in the appropriate row and column depending upon the type of transaction and the planned date.
- The columns and rows are usually summed to indicate the spending or revenue per month and the spending or revenue per cost account category.
- The financial system records actual transactions and provides a monthly report that shows the actual money spent that month by category so it can be compared to the department baseline.
- The project level budget baseline is often expressed in a spreadsheet format and shows the planned financial activity required to complete the project.
- Each column represents a time period, usually a month.
- Each row represents a project phase, project activity, or organizational department that is conducting the project work.
- The estimated costs for all project work are placed in the appropriate row and column.
- The columns are summed to show the estimated spending for each month and the rows are summed to show the estimated spending in each category.
- Actual spending on the project is accumulated in the business financial system and this is compared to the baseline.
- Many projects use the earned value management system for planning and tracking project costs because of its powerful tools for doing variance analysis and forecasting. This will be covered in other modules.
Hints and Tips
- Baselines indicate management intent. The OpPlan, department budget and project budget are seldom matched exactly by actual spending, however, management can assess the variances and decide what if anything should be changed because of them.
- Don’t agonize on trying to make the baselines perfect. Get them close and then start doing the work of the business. You can tweak them as the year or project progresses.
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