Question

choose one of the components in your project management plan and evaluate potential problems associated with that particular aspect of the project; for example: project scope, scheduling, budgeting, procurement, or communications. Use the appropriate professional and scholarly literature to support your risk assessment. As part of your answer, apply your assessment to the actual workplace project or project scenario you have chosen to use for your course project. In addition, share any applicable personal or professional experience.

Answer 1

The Project Management Plan (PMP) is a formal, certified document used to manage project execution.

BUDGETING

Budgeting is making sure that you’re spending lesser than your income and planning for both short and long term future.

Problems related with budgeting ->

1. Budgets are time consuming and costly
Despite the advent of powerful computer networks and multi-layered models, budgeting remains protracted and expensive. The average time consumed is around 4 months. It also involves many employees and uses up to30 percent of senior executives' and financial managers' time.

2. Budgets provide poor value to users
The perception of the value provided by the budgeting process varies widely. In one firm it was apparent that the group board thought the budget gave them control, whereas operating managers thought it was completely irrelevant to their needs.

3. Budgets fail to focus on shareholder value
Budgets focus on internally negotiated targets which tend to be incremental changes from the previous period's outcomes. There is no focus on the maximization of customer or shareholder value.

4. Budgets are too rigid and prevent fast response
The evidence suggests that only 20 percent of firms change their budgets within the fiscal cycle. Another survey result shows that 85 percent of management teams spend less than one hour per month discussing strategy

5. Budgets protect rather than reduce costs
Not spending the budget is a cardinal sin in most organizations. The result is that superiors invariably question why the resource is needed and are understandably reluctant to allow it to pass into the budget for the next period.

6. Budgets lead to unethical behavior
Managing the results (also known as cooking the books) is a frequent outcome of budgeting. Many finance managers are well versed in "managing the slack" and feeding it into the results when needed. However, as we have seen, this practice can border on outright fraud.

7. Budgets focus on sales targets rather than customer satisfaction
Though everyone wants to satisfy customers, that is not how they are measured and rewarded. So they meet the sales target, persuade customers to buy their products, and convince them that their slow-moving stock really is a great deal!

8. Budgets are divorced from strategy
According to a recent cover article in Fortune magazine, around 70 percent of companies surveyed were poor at executing strategy-a massive indictment of the performance management capabilities of budgets.

Truong G., Partington and Peat M. (2006) surveyed Australian firms which revealed that real options techniques have gained a toehold in Australian capital budgeting but are not yet part of the mainstream. Projects are usually be evaluated using NPV, but the company is likely to also use other techniques such as the PBP. The project cash flow projections are made from three to ten years into the future. The project cash flow will be discounted at the WACC as computed by the company, and most companies will use the same discount rate across divisions. The discount rate will also be assumed constant for the life of the project. The WACC will be based on target weights for debt and equity. The CAPM will be used in estimating cost of capital, with the T-bond used as a proxy for the risk free rate, and the market risk premium will be in the range of 6% to 8%. Asset pricing models other than the CAPM will not be used in estimating the cost of capital.31

However, consistent with recent overseas studies, Graham and Harvey (2001) and Bruner, et. Al. (1998) the CAPM is the most popular method used in estimating the cost of capital in Australia. Kester et al (1999) found that 73% of firms surveyed in six Asia Pacific countries, used CAPM. Compared to two previous surveys of US companies, Gitman and Mercurio (1982) and Gitman and Vandenberg (2000), increasing popularity of the CAPM model is apparent.

Assessment ->

The budgeting process is still led by the financial leader of the company (VP Finance or CFO but by this stage you are likely to have a CFO) and the CEO. But the team that runs the budgeting process now includes the entire senior team. That is because each senior team member has control over a meaningful team and piece of the business. So one has to get them all involved in the process.

It's also increasingly likely that your funds are coming from a number of line of companies so you will want to do a more detailed revenue forecast with attention to each segment of revenue. Your sales leader will still be responsible for the revenue forecast, but he or she will need support from finance leader orother senior team members to put the revenue forecast together.

You will continue to use KPIs as a bridge between the revenue budget and the cost budget, but the creation of the KPIs and the forecast of them is now driven by the entire senior team. As I said in last week's post, this is the most important part of the budgeting process so make sure to give the senior team ample time to get the KPIs right.

Cost budgeting in a large company is a much more exhaustive process. The cost budget has a lot more detail and input into it. It is an iterative process where each senior team member brings a cost budget from his or her team and the finance leader integrates it all together and then negotiates with the senior team members to get the numbers where they need to be.

One thing that many companies start doing at this stage is benchmarking their budget numbers versus others in their industry sector. This is mostly done with public company numbers since getting detailed financials on privately held companies is difficult. And it is helpful to look at how profitable their companies are versus yours.

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