ES20

BUSINESS BUDGETING

A business budget provides an Variable costs increase or decrease

accurate picture of expenditures and according to the level of business
revenues and should drive important activity.
business decisions. It also outlines Examples include:
your organization's financial and ❖ Contractors' wages or
operational goals commissions (for salespeople)
❖ increase marketing ❖ Utilities such as electricity, gas,
❖ cut expenses or water that increase with
❖ hire staff activity
❖ purchase equipment ❖ Raw materials
❖ improve efficiencies ❖ Shipping and delivery costs
❖ Advertising (can be fixed or
• Company’s Monthly Budget variable)
❖ Maintenance and repair of
Fixed cost equipment
Cost that does not change over the
short-term, even if a business Unforeseen business circumstances
experiences changes in its sales volume and/or changing business and economic
or other activity cycles, such as:
❖ Gaining or losing a major client
❖ Building or office eases or ❖ Having to purchase or replace
mortgage costs expensive equipment
❖ Loan payments (if using debt ❖ An increase in rent
financing) ❖ Hiring employees
❖ Insurance ❖ An increase in competition
❖ Vehicle leases (or loan payments ❖ Changes in the tax code
if the vehicle is purchased)
❖ Equipment (machinery, tools, VARIANCE ANALYSIS
computers, etc.) It involves calculating and investigating
❖ Payroll (if employees are on the differences between actual results
salary) and the budget
❖ Utilities such as landline phone Variance can be:
and internet charges
1. Positive/Favourable (better than
Variable costs expected)
❑ costs that change as the quantity Example:
of the good or service that a a. Actual figures are better than
business produces changes. budgeted amount
❑ sum of marginal/normal costs b. Costs lower than expected
over all units produced. c. Revenue/profits higher than expected
2. Adverse/Unfavorable (worse than Understand stake holders’ wants and
expected) needs
a. actual figure worst than budget figure Stakeholders want to save as much
b. actual figure worst than budget figure money as possible
c. Cost higher than expected ❖ right track in terms of the cost
❖ project requirements have to be
GROSS PROFIT = profit before any identified, documented, and
deductions confirmed with all stakeholders
• Gross Profit = Net Sales – Cost ❖ project cost estimate to be
Of Goods Sold presented of how much money
• GP = Net Sales – COGS will be required to complete the
= Php1,500,000.00– 878,000.00 project
= Php622,000.00 Place budget for surprises
In the field of engineering, all projects
OPERATING PROFIT = profit earned come with unexpected twists and turns
from a firm’s core business operations. along the way. There are factors and
A shoe company’s operating profit will unforeseen circumstances which were
be the profit earned from only selling not earlier identified.
shoes. Risks may be defined as an event or a
Operating Profit = Gross Profit – situation which probably occurs during
Operating Expenses (for selling shoes) the lifetime of a project or contract that
= 1,500,000.00 - 450,000.00 has potential consequences of
= 1,050,000.00 ❑ damage to property or
environment, or
PROJECT BUDGET ❑ personal injury, and/or
A tool used by project managers to ❑ financial loss or loss of time.
estimate the total cost of a project. Adverse Physical Conditions or
A template includes a detailed estimate Obstructions:
of all costs that are likely to be incurred ❑ Conditions of the ground water,
before the project is completed. and soil conditions
Factors to be considered by Engineering ❑ Pipes and services,
Project Managers ❑ Wells, pits, shafts, boreholes, etc.
1. Understand stakeholders’ wants ❑ Contaminated ground
and needs ❑ Fossils and antiquities
2. Place budget for surprises
3. Develop key performance Delay and Disruption
indicators (KPI) ❑ Labour despute
4. Revisit, review, re-forecast ❑ Late working drawings,
5. Let the employees know about instructions, issued by the
the project status engineer
❑ contractor's inefficiency,
breakdown, or lack of machinery
and equipment
 Let the employees know about the
Damage and Injury to Persons and project status
Property: It is important for the project manager to
❑ Due to negligence of consultant share about the status of the project
or owner in design or supervision cost so that engineers under his watch
❑ Due to uninsurable risks – war, will be mindful of their own costs.
riots, rebellion,
❑ supplier's negligence

Government Policy and Change of

Legislation
❑ Taxes, labour, safety or other
laws
❑ Potential political instability
❑ Delay or refusal of planning
approval for works or temporary
works

Revisit, review, re-forecast

Project Engineers have to check on the
status of the project cost. There might
occur a budget overrun – before it gets
worse, do the necessary budget
adjustments.

This includes reviewing the people

working on the project:
1. to add more engineers, if needed,
to save costs
2. handling the resources, both
human and money, and
converting them into
accomplishments.

Develop key performance indicators

(KPI)
Engineers should establish KPIs or key
performance indicators. These
indicate how much has been spent on
the project as well the difference in the
planned and actual project cost. Revisit,
review, re-forecast