Estimates are used for planning business costs. The estimate needs to include both the amount and the timing of the transaction.
When to Use Estimating
Estimating is used when planning and budgeting business costs or revenues. This is normally done as part of the annual planning process. However, estimates will be created at other times in the year, whenever it is necessary to plan, or replan, the costs or revenues of the business.
- Estimates of business revenues and expenses are “educated guesses” of what will happen in the future.
- You must first determine your assumptions about future business behaviour:
- What will customers buy and when?
- What will suppliers charge for materials and services in the future?
- What locations will the company have operating and what activities will occur at each location?
- How will the business be organized and staffed?
- What projects will be approved and which ones will be cancelled?
- How will government and regulatory agencies attempt to control or stimulate an industry?
- When you have your assumptions, you can then plan the business activities associated with those assumptions.
- Two different approaches are often used for estimating depending upon whether you are estimating a business function or department or you are estimating a project.
- Functional/department estimates:
- Start with the previous year’s budget or actual costs.
- Based upon your assumptions, make any changes to account for planned business locations in operating location or organizational structure.
- Based upon you assumptions, make any changes to account for planned product changes and sales forecast or process changes and operating efficiencies.
- Based upon your assumptions, make any changes to account for business initiatives stopping and the impact of those initiatives.
- Review the changes, both amount and timing of transactions and revise them until you are confident in the numbers (based upon the assumptions),
- Project Estimates:
- Project estimates are heavily impacted by the project boundary conditions (scope, schedule, and resource boundaries). Often the project boundary conditions are revised if the estimate is considered unacceptable, so this may be an iterative process.
- Project estimates normally start with a high level estimate that was created at the time the project was authorized – this estimate is usually a very rough estimate based upon past projects.
- The project team is then asked to estimate the project based upon what they must do to meet the project objectives for scope and schedule.
- This estimate is reviewed with the senior management stakeholders and many times the project boundaries are shifted and the team must do a new estimate with the new boundaries.
- The estimate for most departments is a combination of the department estimate and their department’s portion of approved project estimates.
Hints and Tips
- Estimates are normally based upon previous experience, so use previous year’s budgets and previous project plans and actuals to assist in creating the estimates.
- Some organizations have estimating departments with specialists who have databases and formulas that can provide estimates. When using that approach, check closely to ensure they are using data from sources with similar assumptions to those you have developed.
- Spend some time working with your subject matter experts, including cross-functional experts, to identify and document all assumptions. When the assumptions are documented, the estimates are fairly easy to calculate. When the assumptions are not documented, everyone will have their own set of assumptions they are using for generating the estimates and heated discussions will often arise around the numbers due to unstated or unrecognized assumptions.
- An estimate is a guess. Hopefully it is close, but it is almost always wrong at some point. Don’t get so invested in your estimate that you are not willing to acknowledge that it is wrong and change it when a clearer understanding of the assumptions can be made.
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