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Budget baselines should be used if costs must be controlled within a department or on a project. 

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Quick reference

Budget Baseline

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.

Instructions

  • 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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  • 00:03 Hi, I'm Ray Sheen.
  • 00:04 I'd like to talk with you now about budget baselines.
  • 00:07 These are managements financial intent of
  • 00:10 what they'll be doing with the company over the next time period.
  • 00:14 At its core, a budget baseline is a communication tool.
  • 00:17 A baseline communicates a plan for how an organization or
  • 00:20 individual intends to achieve a goal.
  • 00:23 Managers can then use that plan to guide their decision and track their progress.
  • 00:28 A budget baseline puts that plan into financial terms.
  • 00:31 A manager can then track their actual expenditures and
  • 00:34 compare it to the plan to determine if they are likely to achieve
  • 00:37 the financial goal represented by the budget baseline.
  • 00:41 At the business unit level,
  • 00:42 the budget baseline is often called an annual operating plan or OpPlan.
  • 00:46 And is normally created for each fiscal year.
  • 00:49 For a functional department like IT or engineering, the annual department
  • 00:53 budget is the baseline, and it is also created for a fiscal year.
  • 00:57 A project budget baseline is the spending plan for the project, and
  • 01:00 it normally runs from project start to project end.
  • 01:04 Let's dig a little deeper into each of these.
  • 01:06 I'll talk about the OPPLAN first.
  • 01:09 As I mentioned, it is normally set at a business unit level.
  • 01:12 And, it conveys the business unit management's team intent for
  • 01:16 how they plan to financially execute the business strategy during the year.
  • 01:20 At the top level, it usually takes a form of an earning statement and
  • 01:24 cash flow statement for the year with a balance sheet at the beginning and
  • 01:27 end of the year.
  • 01:29 It has all the plan sales revenue and all the plan costs.
  • 01:33 If there are some unusual items that are planned to occur during the year
  • 01:36 these are included.
  • 01:37 But often those are segregated into special accounts.
  • 01:41 These estimated financial reports are often shared with
  • 01:44 investors to show them management's intent for the year.
  • 01:47 The other financial baselines, such as the sales forecasts, department budget, and
  • 01:51 project budgets are derived from the OP plan.
  • 01:55 Though often in an iterative manner,
  • 01:57 with feedback from the functional departments before it is finalized.
  • 02:01 The business unit management is often measured upon how well they meet
  • 02:05 their OPPLAN commitments.
  • 02:07 Achieving OPPLAN is viewed as a sign of a good manager and leader.
  • 02:11 Let's switch over to the functional department budget.
  • 02:14 The department budget baseline contains the planned costs and investments that
  • 02:18 the functional department intends to incur during the time period of the budget.
  • 02:23 Normally these budget baselines are set up for a fiscal year.
  • 02:26 The functional management team is often allocated a total amount of money for
  • 02:29 the year by the business.
  • 02:31 They must use that money to sustain their operations and implement the strategy.
  • 02:36 The budget baseline shows how they intend to do that.
  • 02:39 The department budget baseline is usually allocated into accounts, and
  • 02:43 those accounts are spread out over 12 months
  • 02:46 to determine the spending that is planned for each month in that account.
  • 02:50 As a department manager, I would normally have at least 20,
  • 02:53 and sometimes as many as 50 accounts.
  • 02:56 Not counting project accounts.
  • 02:58 Some of the more common accounts are personnel, travel,
  • 03:01 supplies, contractor or temps, and since I was an engineering manager,
  • 03:05 I normally had several equipment accounts.
  • 03:08 Use an account structure that makes it easy for
  • 03:11 you to understand what is happening in your department without burying yourself
  • 03:15 or your people in the bureaucracy of tracking micro accounts.
  • 03:20 Generally, large projects have their own budget baselines.
  • 03:23 These projects are typically cross-functional.
  • 03:26 So the project costs are spread across multiple departments.
  • 03:29 The project budget baseline is where they are coordinated and integrated.
  • 03:32 The project budget baseline should have all the planned spending,
  • 03:36 both investment and expense that are required to conduct project activities.
  • 03:40 Unlike the OP plan and department budget, which are based upon the fiscal calendar,
  • 03:44 the project budget is based upon the project start and end dates.
  • 03:49 However like the OPPLAN and department budgets,
  • 03:52 the project budget baseline shows the project manager's intent for how resources
  • 03:56 will be applied to project activities to achieve the project objective.
  • 04:01 The project budget baseline is also allocated into sub accounts.
  • 04:04 Just like the department project baselines.
  • 04:06 However, the project often has many more accounts.
  • 04:10 It must further allocate its budget based upon project phases, business departments,
  • 04:14 and sometimes, even creating a separate account for each project task.
  • 04:21 Budget baselines are how management communicates its plans and
  • 04:23 intent for the business.
  • 04:25 The OPPLAN plan looks at the annual plan for the business.
  • 04:29 The department budget looks at just the department plan on an annual basis, and
  • 04:34 the project budget looks at the project plan from project start to project finish.
  • 04:39 All three are interrelated.

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