PROJECT BUDGETING

01, 06, 2009 This publication was produced for review by the United States Agency for International Development. It was prepared by BearingPoint, Inc.

LOCAL GOVERNANCE TRAINING PROGRAM PROVINCIAL DEVELOPMENT COMMITTEE (PDC) TRAINING MODULE SERIES

PROJECT BUDGETING
HANDOUT MODULE.5
This report is made possible by the support of the American people through the United States Agency for International Development (USAID). The contents of this report are the sole responsibility of BearingPoint, Inc. and do not necessarily reflect the views of USAID or the United States Government.

USAID CAPACITY DEVELOPMENT PROGRAM CONTRACT NUMBER: 306-C-00-07-00508-00 BEARINGPOINT, INC. USAID/AFGHANISTAN

TABLE OF CONTENTS:
1.0 TITLE: DIFFERENT APPROACHES TO BUDGETING.............3 2.0 LINE-ITEM BUDGET GUIDELINES.....................................5 3.0 TITLE: THE MAJOR COMPONENTS OF BUDGET.................5 4.0 1. RECURRENT REVENUE I.E. REVENUE GENERATED FROM STABLE SOURCES LIKE.................................................5 5.0 TITLE: PROJECT EXPENDITURE CATEGORIES....................8 6.0 TITLE: PREPARING THE PROJECT BUDGET.....................11 7.0 TITLE: BUDGET MONITORING AND EVALUATION............16

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Title: Introduction to budgeting Preparing a meaningful and useful budget is best done as an organized and structured team exercise. The team must be comprised of people from the Finance and Programme departments.

Definition of budget
A budget is a document that translates plans into money - money that will need to be spent to get planned activities done (expenditure) and money that will need to be generated to cover the costs of getting the work done (income). It is an estimate, or informed guess, about what is needed in monetary terms to do the work. Budgeting is increasingly a continuous or year-round task and in many organizations, one works with several different budgets at the same time: Developing next year's (and sometimes another 3-5 year forward projected budget), Managing the current year budget, and Analyzing the results of the prior year's performance compared to the budget.

Project budget
The project budget is the estimated financial plan for the project, for which funding is required. This document include the expenses you anticipate to incur for a specified period of time, as well as earned income that will be generated during the course of the project. The budget represents a financial picture of the project.

Why is it important for a project to have a budget?

The budget is an essential management tool. Without a budget, you are like a pilot navigating in the dark without instruments. The budget tells you how much money you need to carry out your activities. The budget forces you to be rigorous in thinking through the implications of your activity planning. There are times when the realities of the budgeting process force you to rethink your action plans. Used properly, the budget tells you when you will need certain amounts of money to carry out your activities. The budget enables you to monitor your income and expenditure and identify any problems. The budget is a basis for financial accountability and transparency. When everyone can see how much should have been spent and received, they can ask informed questions about discrepancies.

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 You cannot raise money from donors unless you have a budget. Donors use the budget as a basis for deciding whether what you are asking for is reasonable and well-planned.

Three stages of managing budgets

Budgets are managed in three stages: planning, monitoring and reviewing. Planning setting objectives and deciding what this will mean in terms of income and expenditure, within the overall limitations of the project. Monitoring measuring how well the actual income and expenditure compares to the planned amounts. Regular statements identify the differences between budgeted and actual figures. Any corrective action is taken on the basis of these statements. Reviewing evaluating through a general review how closely objectives have been achieved and identifying a new framework, if necessary, for the forthcoming period. This takes place towards the end of the budget cycle and maybe the start of the following years planning.

Module 5: Budgeting Hand-out 2

1.0

Title: Different approaches to budgeting

There are four main approaches to budgeting. These are incremental budgeting, program budgeting, performance-based budgeting and zero-based budgeting. Incremental budget the figures in this budget are based on the actual expenditures for the previous year, the project team simply adds a percentage (increment) for an inflationary increase for the new year. Performance-based budget organizes the budget into quantitative estimates of costs and accomplishments. The activities and services are based on standard costs of inputs. The technique is useful only to those projects which lead to physical achievements which are quantifiable. Program budget lists the expenses of the project and then analyzed against the functions they are used. The advantage of this kind of budget is that one can see what the money is being used for. Zero-based budget starts from zero with the proposed activities for the year. This is a more detailed and accurate budget, thus, it takes more time and energy to prepare the budget this way. This is appropriate for new projects.

Program budget -- For a livestock production program, an example of a program budget would be the following:

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Expense Category Personnel Materials Supplies Transportation Telephone Services Total

Beneficiary selection 2,500 Afs 1,500 Afs 500 Afs 1,000 Afs 50 Afs -5,550 Afs

Distribution of animals 5,000 Afs 100,000 Afs 1,000 Afs 10,000 Afs 1,000 Afs -117,000 Afs

Animal health and vaccination 10,000 Afs 20,000 Afs 400 Afs 5,000 Afs 1,000 Afs 5,000 Afs 41,400 Afs

Training and workshops 25,000 Afs 10,000 Afs 5,000 Afs 2,000 Afs 1,000 Afs 4,000 Afs 47,000 Afs

Total

42,500 Afs 131,500 6,900 18,000 3,050 9,000 210,950 Afs

If we omit the four columns in between and just show the first and the last, we will have a lineitem budget.

Performance budget for Training services may look like this: Activity Outputs Cost per unit Total Costs $5000

Training needs assessment 2 events in $2500 Shiber and Panjab with 30 participants Conduct of training courses 20 events in Bamyan with 20 participants each 3 events for 3 days with 50 participants each 23 one day event 25 events, brochures and $3250

$65,000

Conduct of learning workshops

$5350

$16050

Course evaluations Participant recruitment

$30 $50

$690 $1250

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fuel Total $87990

Line-item budget -- The budget is a series of "lines," each of which represents a different item of expenditure or revenue. One line may be for professional salaries; another may be for equipment or materials. Other lines are for various categories of the operating budget -supplies, telephone, travel, etc. Even when a more complex budgeting technique is used, the "line item" budget usually exists.

2.0

Line-item budget guidelines

The line-item budget should include all income and expense associated with the proposed project. Total income should equal total expenses. If income exceeds expenses, please explain the rationale in detail in the budget narrative. For multi-year requests, separate budget form for each year of requested funding is submitted. Prepare a summary budget as required. Grant periods of 18 months or less may be treated as one budget period, and require only one form. Each budget form includes a name, phone number, and email address of the contact person responsible for and familiar with the project budget.

Module 5: Budgeting Hand-out 3

3.0

Title: The major components of budget

All budgets have two aspects to it: revenue (income) and expenditure. Revenue Project revenue refers to the money raised for the project. It can be money given by a donor or from other sources such as training fees in the case of a training project, products sold such as in carpet weaving project, etc. For the Government, there are two kinds of revenues: 4.0 1. Recurrent Revenue i.e. revenue generated from stable sources like Taxes (road users tax, airport tax, income tax, excise tax, etc.) Charges: paid by consumers of goods and services like trade, professional and driving licenses. Special levies by government for specific purposes

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2. Capital Revenue: i.e. revenue generated for developmental purposes. Borrowing (loans from ADB, WB, etc.) Aids from donor agencies and other countries (Grants, bilateral and multilateral aids) Dividends which include income from government investments (authorized capital stock of government owned or controlled corporations) Sales of government assets (land, buildings, etc.)

Expenditure Expenditure refers to money spent by the project to carry out its obligations 1. Recurrent Expenditure These are regular expenses of running government services namely: Salaries and allowances of government workers Maintenance of government equipment, buildings etc. Remuneration for public office holders. Traveling, accommodation, electricity, telephone and other expenses incurred by government ministries and departments. Government subsidies on agriculture, education etc. Interests on loan obtain by government. Construction of buildings, roads, institutions, drainages etc. Establishment of industries Building of hospitals, schools and colleges. Purchase of drugs.

2. Capital Expenditure: These are expenses on development projects.

How do you decide which categories and line items you should use in your expenditure budget? If this is the first time you have done a budget, begin by listing all the items that are going to cost the organisation or project money. Later on, you will have some idea of the categories and items that make sense for your organisation or project so you will be able to take short cuts when you list your line items. Once you have the list, group things into categories according to the emphasis you put on categories in your management practices. So, for example, if you, as management, think it is important to keep track of training costs, then training costs would be a category. Items such as stationery, venues, printing costs, food, accommodation, transport, trainers fees and so on would be line items under that

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category. However, perhaps your organisation does not do much training and only intends to run one training course as part of a bigger project. Then your category might be Project X, and training course might be one line item. Think in terms of cost centres. A cost centre is a grouping of activities that make a coherent financial unit. So, for example, each project within your programme might be a cost centre. You then budget both income and expenditure for that cost centre and keep your financial records in terms of cost centres. This enables you to assess each project, department or unit financially. If you opt for a cost centre approach, your cost centres will determine the main categories under which you list line items. Sometimes it is possible to work out how much a category of expenses is costing even if that category has not been listed as such, and the item is reflected as a line item under a number of categories. So, for example, you may not have a category transport, but if you want to know how much transport is costing the project or organisation, you can add up the transport line item listed under several categories. If you plan to raise funds to cover a particular category, then, obviously, that category needs to be distinct in your budget. So, for example, if you want to raise money for capacity building in communities, then you need a category in the budget that is headed Capacity building in communities. Under it there might be line items such as workshops, fieldworker salary, transport and so on. Your budget notes would explain how you arrived at the workshops amount. PROJECT EXPENSES Personnel Administrative Assistant (50% of full time expense) Fringe benefits (15%) Full time trainer Fringe benefits (15%) Total Workshop materials Staff travel Food and accommodation Total project expense $82,000 $57,500 4,000 6,500 14,000 $10,000 1,500 40,000 6,000

How do you decide which categories and line items to include in your income budget? Look at the section on where does the income budget come from? These are the possible categories you could have for your income budget. Under a category such as

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sales you might have line items such as training, publications, craftwork, or other services that you sell. Under possible donations you might have line items such as used bottle collections, campaigns , direct mail appeals, donors and so on. PROJECT REVENUE Grants Compassion Foundation Japan Embassy Provincial Government of Bamyan Individual contributions Sales Publications Carpets Training fees Total revenue 2,000 10,000 5,000 $87,000 $ 30,000 25,000 10,000 5,000

Module 5: Budgeting Hand-out 4

5.0 Title: Project expenditure categories

Project Expenditure is a charge against available funds, evidenced by a voucher, claim, or other documents. Expenditures represent the actual payment of funds. Project expenditure generally fall into two broad categories: Direct costs also known as operational costs are expenses directly associated with the project. The funder is expected to provide for all direct costs which fall into the following categories: Salaries and wages list the professional personnel that will be involved along with the percentage of effort. List the staff required and the estimated number of calendar months to be devoted to the project each year. Fringe benefits this varies according to the personnel categories. It may include travel allowances, childrens education, phone credits, health and medical plan and other representation allowances.

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 Materials and supplies expendable items that would have useful life of less than one year. It may include office supplies and materials depending on the project. Capital costs equipment and other investments which would be necessary to implement the project. They will remain organizational assets even after the project is over. Vehicles, computers and photocopiers are some examples. Depending on how you use the capital costs, you might budget for it under direct costs or indirect costs. Travel includes domestic and foreign travel and other travel related cost. Contractual services this refers to services contracted out to be able to implement the project activities, includes consultants and occassional hiring of staff to complement current project staffing. Indirect costs sometimes referred to as Administrative costs or overhead costs, are the expenses incurred for general operations while implementing the project. For example, administration cost, finance management cost, human resource management cost, building use and maintenance, utilities, internet services, etc. They are calculated as a percentage of direct costs. The percentage depends on how much the donor would allow. While indirect costs are true costs, they cannot be identified specifically with the project or activity. Why does it matter which category you choose to estimate your costs under? Because many donors prefer to fund direct costs or operational rather indirect costs. Frameworks for estimating costs Depending on the needs of your organisation or project, your headings may be a bit different Estimating direct or operational costs: Activity: (Example: Conducting training, Distribution of seeds, Selecting beneficiaries, etc.) Unit cost Materials The unit cost is the cost of a single item, or one unit. e.g. Cost per day, per kilometer, per person. Quantity This is the number of units (how many) you will need for the activity. e.g. 200 training packs, 130 days of trainers time. Total cost of item Multiply the total number of units by the unit cost.

Salarie and benefits Equipment Services Transport

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Total cost for Activity

The sum of all the individual costs

Estimating indirect or organisational costs: Once you have done your estimates here, you may decide to assign a percentage of the various items to specific departments or projects. This is acceptable practice. You can also distribute your estimates across project duration. For example, in a three year project costs may be assigned for each year.

Year Unit costs Management: Salaries/benefits: Donor liaison: Governance liaison: Public relations: Fundraising: Human resourcing: Administration: Salaries/benefits: Equipment: Software: Stationery: Governance and 2003 2004 2005

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organisational development: Board meetings: Organisational processes: Resource centre: Overheads: Office rental: Electricty and water: Insurance: Maintenance: Legal fees and audit fees: Annual totals: Total: (grateful thanks to Olive Publications for these frameworks.)

Module 5: Budgeting Hand-out 5

6.0 Title: Preparing the project budget

A complete budget is not prepared until the final stage of project planning. Cost should be kept in mind during planning so that the budget for your proposal will not be unrealistically high. The project becomes more feasible when the project proponents use locally available resources. Some principles that guide project budget preparation

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Affordability the budget should be prepared with the available resources in mind Sustainability ongoing operating and maintenance obligations have to be carefully considered in all development investments Efficiency and effectiveness implementing projects cheaply Comprehensiveness includes the estimate of all foreseeable items of receipts and expenditures Specificity and clarity items of receipt and expenditures shall be specific, lump sum provisions avoided Accuracy gross under estimation and over estimation are serious budget irregularities Periodic review and corrective action update estimates, adjust level of spending as necessary

Stages in planning the budget

1. Identify project objectives 2. Decide what is the limiting factor (what restricts the budget). It can be lack of money, human or other resources and time required to implement the project. 3. Gather the data. Ensure that data is available: last years information, level of inflation, amount of salary increases and increments, estimates from suppliers, level of income or grant support available, external factors influencing income and expenditure such as exchange rate. 4. Determine the amount to be received how much is confirmed, how much is possible. Be realistic as possible in estimating and showing the status of expected funding. 5. Determine the amounts to be spent break down items into categories following existing budget headings or following the budget headings required by the donor. Check for inflation and amounts for programme growth. 6. Construct the budget List the budget item by item, ensuring that the totals of both income and expenditure are the same and include notes of all calculations. It is also useful to construct a monthly cash flow forecast for the project period.

Where to begin
The work plan is the take off point for any budgeting exercise. A work plan is a schedule, chart or graph that summarizes the different components of a project and how it will be implemented within a specific time period. The work schedule a table that summarizes the tasks to be performed in a project, the duration of each activity and who is responsible for the different tasks. - review and revise the list of tasks you prepared to achieve your project objectives - review the staffing for the different tasks, taking into account the following: who is responsible for the tasks, the amount of time needed to complete the tasks, consider whether you will need consultants or short-term hiree for certain tasks
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fix the dates indicating the period in which each task will have to be carried out and calculate the number of working days per person required to complete each task The Gantt chart is a planning tools that shows graphically the order in which various tasks must be completed and the duration of each activity - shows the tasks to be performed - who is responsible for each task - the time each task is expected to take - the length of each task is shown by a bar extended over the number of days, weeks or months the task is expected to take Specify for each activity in the work plan the required resources. Determine for each resource needed, the unit cost and the total cost. Estimating the budget There is no hard and fast rule in estimating the budget. There are four basic methods to estimate a budget: Analogous estimate this technique uses the actual costs of previous, similar project for the basis of estimating the costs of current project. This method takes less time but is less accurate. Analogous estimates are most reliable when a previous project is similar in the objectives and activities to the current project. Top-down estimate this technique determines the number of activities or outputs the project can produce with a given budget. The project may decide to reduce or increase certain activities or reduce the number of outputs to fit the budget limitations. Bottom-up estimate this technique requires estimating the individual activities and the cost of each input and adding them up to get the project total. Staff responsible for an activity or with expertise in a specific area develops the estimates. In this technique the estimate starts with a fixed number of activities and the estimate calculates the total budget. Parametric estimates this technique uses standardized parameters that define the costs of an activity or tasks for specific rate or output. For example, the cost of training one person is a rate that can include people, material and equipment costs that once it is multiplied for the required number of people that need to be trained, gives the total budget for the activity. This technique is also widely used in construction projects. A square foot of building can easily be given standard price.

In using any of these techniques, the following are useful practice to arrive at the estimates: Refer to the budget notes of previous project budgets Be aware of existing resource acquisition policies, guidelines and procedures. Information from similar past projects can be used to gain an understanding of budgeting strategies Determine the resource requirements for each task Determine the approximate cost of each requirement by: - getting information from the people responsible for managing the tasks
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labor costs should factor in vacation time, sick leave, breaks, meetings, travel time, holiday, etc. non-labor costs include material costs, travel, computer equipment, vehicle costs, documents assumptions behind the budget

It is important to be able to justify your calculations when you are estimating costs. Even if you use the incremental method of budgeting, do not be tempted to simply take last years budget and add a percentage amount on top for inflation. You should think about whether all the costs are justified.

A budget worksheet:
Budget Budget Ref Item/Description Total Cost $ 20 4 1,0005 days x 4 staff 2,000Local newspapers

Unit

Unit Cost Quantity $

Notes

B1 B2

Staff Training Recruitment advertising

Days Entries

50.00 500

The best approach is to list all the inputs you will need for each specific activity and then work out the number and unit cost of each input. From the worksheet above, it is easy to produce a summarized budget for each line item and update if units or costs change. Budget notes The notes section explains to other people how you have worked out your budget. This is helpful in taking account of changes in project plans or costs. Budget notes can also be a narrative listed below the budget estimates.

PROJECT BUDGET Food for Work Expenses Salaries Project coordinator E3050100001 Field worker Benefits (20%) 7,000
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$25,000 10,000

1. A project coordinator is necessary to manage the program and ensure that services are delivered 2. Benefits include: employer paid taxes, health insurance

Contingencies Avoid the practice of adding a bottom line percentage for so called contingencies on the overall budget. As a rule, donors do not like to see this and it is not a very accurate way of calculating a budget. It is better to calculate and include a contingency amount for relevant items in the budget: salaries, insurance, fuel. Every item in your budget must be justifiable adding a percentage on the bottom is difficult to justify. Forgotten costs There is a tendency in the NGO world to underestimate the true costs of running a project for fear of not getting the project funded. The most common of the forgotten costs are the indirect or non project costs: Staff related costs (e.g. recruitment costs, training, benefits and statutory payments) Start-up costs (e.g. publicity, coordination meetings, ) Overhead or core costs (rent, insurance, utilities) Vehicle running costs Equipment maintenance (e.g. for photocopiers, computers, printers, etc) Governance costs (e.g. board meetings, fees to Trustees, etc.) Audit fees

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Module 5: Budgeting
Hand-out 6

7.0 Title: Budget monitoring and evaluation

The budget is the most important tool you have for monitoring the finances of your organisation, project or department. Budget monitoring is a documented observation of processes and activities of government geared towards implementing the budget over a period. It is a way of ensuring that monies voted for various projects and activities in the budget are actually spent and put into good use. Stages in monitoring a budget 1. Prepare or receive the information comparing the budget with the actual usually prepared monthly or quarterly. 2. Monitor the income and expenditure regularly. Identify the variance and be ready to explain the reasons for it. 3. Take action. Based on the monitored information the following are possible action: Take no action if the actual income or expenditure is temporarily incorrect but will right itself in the next period Predict what will happen if the current trend continues of the rest of the budget period Take action to ensure that an income or expenditure item reverts to what was expected in the original budget. It might be necessary to reduce costs, cut back on planned programs, etc. Consider obtaining permission to correct under/over budget items, an under spending be transferred to an overspending in another budget item. Inform people what is needed in order to keep within the budget. Continue to monitor the budget and ensure that any action has been effective. Below is an example of a budget and actual statement with notes for the first three months of the year.1

Training for Development Budget and actual statement

1

BOND. July 2003. BOND Guidance Notes Series 7: Project Budgeting and Accounting. London.

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Annual budget 2 months Income

Grants Fees and charges Donations Interests 300,000 376,000 50,000 2,050 728,050

Budget (JanMar) 3 month s

150,00 0 94,00 0 12,83 6 256,83 6

Actual (JanMar) 3 months

varian %varia ce 3 nce 3 month months s

Notes

150,000 89,304 5,289 244,593

(4,696) (7,547) (12,243 )

5% (59%) 5%

1 2 3

Total income

Expenditure
Training programme Trainers fees Materials and printing Hire of premises Travel/accommodation Other expenses Overheads Office salaries Rent Electricity Travel expenses Hire of premises Office costs Audit fees 11,230 82,000 38,970 16,020 107,860 34,390 7,300 43 4,0 05 42,7 50 8,5 98 Total expenditure 728,050 228,9 93 192,160 3 36,83 16% ) 07 20,5 00 9,7 1 (511 2,8 224,000 55,690 107,860 116,510 34,080 50 31,1 20 8,5 20 2,833 20,500 9,265 3,206 41,299 9,109 (26 ) 478 799 1,45 85,6 00 15,3 50 42,7 47,251 20,387 41,299 35,109 3,201 ) 5,319 (1%) 5% 20% 3% (6%) 8 9 38,34 9 (5,037 ) 1,451 (3,989 45% (33%) 3% (13%) 62% 4 5 6 7

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Budget notes: 1. 2. 3. 4. 5. 6. 7. 8. 9. Training activities have been 5% less than the predicted level in the first 3 months. A large proportion of the donations will be received in the May and November appeals. Interest will be added in June and December. 32,370.00 of trainers fees for this period is due to are paid in April. With this included in the actual expenses are 7.5% under budget, largely caused by the reduced training activities in the period. Materials and printing have been purchased for a significant part of the year. It is estimated that the actual expenditure will be slightly under budget at the year end. Due to lack of training activities some of the staff and volunteers have been traveling to promote the projects activities. This has resulted in additional travel and accommodation costs. The estimate for other expenses was significantly over budgeted. It is now predicted that total expenditure for this item will be 20,000. It is expected that there will be additional travel expenses in the next three month period. Stationery for the whole year has been bought in this three-month period.

It is important for those reviewing this statement to raise questions and obtain clarification. The notes already answer some of the questions. However there are still some areas of concerns that can still be raised. Variance A variance is the difference between a budgeted, planned or standard amount and the actual Kabul, Afghanistan amount incurred. Variances can be computed for both expenses and revenues. Variance www.USAIDCDP.org should not be ignored. They should be analyzed and acted upon. If variances are extremely small, then, they can be overlooked. Significant variances have to be investigated. Variances can be artificially created. For example, if you distribute expenses equally over a period of 12 months. In reality, the expenses cannot be the same for each month because the level of expenses per month differs based on the activities identified in the project plan.

USAID Capacity Development Program

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