Budget of a project

Budget of a project
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Methods and techniques

Budget of the project (investment or organizational project) is one of the most important result of project preparation stage. It is connected with the purposeful reduction of financial resources in other areas of company, but in the future it should generate positive cash flows.

Stages of project budget preparation

The preparation of the budget because of its significance is a complex process and usually consists of several stages.

Definition of project long-term goal

The first step is to define long-term goals and the search for new opportunities to invest company resources. Long-term objectives are to serve decision-makers as a prerequisite for further investment decision. In turn, the search for new investment opportunities associated with good information system that allows for finding the best project opportunities and submitting them to a higher level in a decision-making process. Of course, how the system is developed and how much decision-making levels must pass such a project, depends on the size of the company.

Management of a company can decide on the involvement in the particular investment project using the classification based on one or more characteristics. The most common classification criteria is:

  • size – this refers to determining the feasibility of projects and establishing rules for their adoption, depending on the expenditure of scarce resources allocated to them,
  • type of benefits,
  • degree of interdependence of projects – it may be due to the following reasons:
    • adoption of the project A excludes the adoption of the project B (projects mutually exclusive),
    • adoption of the draft A increases the benefits of the project B (complementary projects),
    • adoption of the project A reduces the profitability of the project B (substitute projects).

Forecasting cash-flows in budget of a project

The second stage of preparation of the budget is forecasting cash flows. It shall be made at the time of the emergence of new project proposals. Estimates of project expenditure, before going to the budget must first be verified. However, the amount and timing of future cash flows are uncertain when drawing up the budget, as well as throughout the life of the product.

Cost estimation

The third step is to estimate the cost of execution of project. In practice, it is often overlooked. However, it is important because it helps to improve future decisions by assessing results of previous projects. Its main function is to optimize the process of forecasting and operating of the company.

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