Budgeting Is a Critical but Rare Business Competency.

Planning projects and developing budgets are critical functions in all businesses. Don't wing it. Use this guide to help get the best outcome for you and your team.

Growing a business requires investment. To maximize the investment, good project planning and budgeting are essential. As a strategic business coach, I help companies formulate a clear strategy and identify the projects that need focus to drive growth. While many of the companies I work with have good project planning skills, budgeting often proves to be a challenge.

Here are seven steps to create a budget that is both accurate and useful.

1. Set clear success criteria.

The first thing is to establish a clear and objective set of success criteria for your project. Most teams miss this step and struggle to align themselves with a clear set of actions. This is because they all have a different vision for what they are trying to accomplish and different metrics that define success.

2. Determine an expected return on investment.

Every project should yield some form of return. This could be a direct financial return, but it could also be measured in other ways, such as increasing production capacity, expanding distribution reach, and developing intellectual property.

The point is to create a set of reasonably objective measures of return for the time, money, and energy you'll be putting into the project and to measure the results over time. This will allow you to monitor progress and make necessary adjustments.

3. Identify key risk factors.

Every project has risks involved. The only way to avoid risks is just to stay home and not try. The questions on each project are:

Have we uncovered all of the risks?

Can we manage and mitigate the risks?

How are we going to monitor risks to give us time to respond effectively?

Most projects fail not because they have a poor plan but because they fail to anticipate risks that could have been addressed and mitigated with some foresight.

4. Figure out major work efforts.

Once high-level goals, expected returns, and risks are identified, you can begin planning the work. Start with significant sections and phases. Find clear break points in the work streams and natural transition points in the process.

Begin to organize the work into smaller tasks and work plans using project management tools like Gantt charts and PERT--program evaluation and review technique--charts to figure out dependencies and the proper order of events.

5. Crowdsource work estimates.

Estimating may be the hardest part of a project; and often the part that is most poorly done. The only way to get a truly accurate estimate is to do the project a few times, collect data, and find averages and likely variations.

Given that this is impractical in most situations, you need to interpolate and extrapolate from other projects and experiences. One of the best ways to do this is to use real-time feedback from groups in a method called the wisdom of the crowds, an approach developed by James Surowiecki and described in his 2005 book by the same name. By independently collecting data from different people with different perspectives, you can analyze averages and spreads to gain a better understanding of the effort likely to be involved.

6. Calculate reasonable contingencies.

Rather than padding each task with extra time, estimate each task within an 80 percent confidence interval and then calculate your contingency at the overall project level. If you are highly confident in your estimates, you might only need a 10-20 percent contingency for the project.

If you're highly uncertain, you might need 100 percent or more in your budget. Dial it in based on complexity, risk, and familiarity with the tasks.

7. Set clear decision milestones.

Most project horror stories involved projects that have spiraled out of control and spent huge amounts of time and energy trying to save them. Eventually, they fail, necessitating a complete restart, often with a brand-new team. Instead, create clear decision points with progress requirements, and if you don't meet the milestone, stop the project and replan from the ground up.

Don't get caught in the sunk-cost fallacy and feel the pressure to keep going just because you've already spent time and energy. In complex, high-pressure situations, flip the process and assume you're canceling the project at each milestone and only continuing if all the milestone requirements are successfully met. It's better to lick your wounds and start over than bleed out on the field.

While there are all types of projects with their characteristics and challenges, these guidelines can ensure adherence to core best practices, increasing your chances of success. You'll run into issues and have setbacks, but great teams understand this part of the process and hit more base hits than strikeouts over time. You don't need to be perfect, you just need to be better than the competition.

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