Module 5: Financial, Resource and Risk Management

3.1 What is a budget?

There is often confusion between a project plan and a financial budget. The main differences between the two are:

• The scope of a plan is more extensive than a budget, which is based primarily on the financial management of a project;
• The function of a plan is to identify:
• internal strengths and weaknesses
• critical deadlines and milestones, especially those required in the grant deed, agreement, or contract
• risk assessment and how to manage risks
• the optimum way forward for the project
• The primary function of a budget is to plan short-term revenue, expenditure, and cash flow
• A plan should cover the entire timeframe of a research project, whereas budgets should be prepared on at least an annual basis
• However, both a project plan and a budget need to be reviewed regularly.

There are five conditions for progress in planning, budgeting, and control:

1. An overall budget plan to allocate resources so that they are appropriately deployed
2. A system for recording transactions, accurately and completely
3. A system for reporting actual performance on a regular basis
4. Some knowledge of the behaviour of costs during the project
5. Some ability to forecast levels of activity during the project.

3.2 The benefits of budgeting

The benefits of budgeting are as follows:

• Allocation of resources – an approved budget gives the authority and boundaries within which your research team can operate with confidence;
• Planning and coordinating the activities of the project is more regulated;
• Where each research project has a budget, it allows for the review of total university performance for the coming year and for actions to be identified and taken where necessary;
• Good budgeting allows faculties to keep good oversight over all the projects that are being undertaken. While the funds must be spent according to the deed, agreement, or contract that attaches to the research, the monitoring process can help deans to monitor, as a risk management strategy, the levels of expenditure against available resources;
• Each research leader can take responsibility for his/her share of the financial performance of each project; and
• Monitoring, control, and corrective action can be readily undertaken where necessary.

3.3 Why do I need to prepare a budget for my research project?

In most instances the answer is simply that a budget is prescribed in the grant, agreement, or contract you enter into with the funding body. In other words you have no choice.

Regardless of these requirements, a budget is necessary to ensure that you have sufficient resources to complete your research. (Resources include financial, personnel, equipment, materials, and the use of facilities.) Your budget will ensure you set boundaries around what is spent on each of your expenditure categories. It will ensure you have sufficient funds to maintain support for the project right through to the end of the designated period.

3.4 What do I need to include in my budget?

For the most part the likely costs will generally relate to:

• Direct costs, which include salary and on-costs of staff funded by the project, salary and on-costs of academic staff working on the project, consumables, capital items, direct use of specialised facilities (for example the use of a wind tunnel in scientific research), travel, etc.
• Subcontractor costs
• Indirect costs, which are those costs that are not necessarily directly related to the project, but which must be incurred nonetheless, such as university physical and ICT infrastructure, and access to research equipment and facilities
• Overheads, which may be a percentage of direct costs or calculated in a different manner (refer to Topic 2)
• GST where applicable (refer to Topic 5).

3.5 Setting up the project budget

Your university will have a particular financial system that it employs to set up new project grants.  When you commence a project, one of your first tasks will be to allocate your received funding against the different account codes (e.g. staffing, travel, office expenses). The majority of your money is likely to be allocated to staffing costs. This commits the money to ensure you do not run short prior to the end of the project. 

It is likely that your university has prepared a template or pro-forma spreadsheet for this process.  Where possible, use the official codes that are generally applied in your university. Consistency is easier to achieve if you don’t recreate a system each time. Obviously your budget will relate to the estimated costings carried out as part of the application process.

Table 3 offers an example of the UWA cost and account codes.  Consider which elements you would employ in your typical project.  

 

3.6 Creating processes and protocols for expenditure

As the delegated authority for the expenditure of funds, you are responsible for how your budget is committed and then deployed.  There are some important principles that, if followed, will benefit you:

• Limit the number of people who can spend money from your grant. The more hands in the cookie jar, the less accountability for the outcomes.  Be sure that any people with that authority have a clear understanding of their boundaries and the budget allocation that they can commit.
• All expenditure should be carefully documented and invoiced, and recorded through the university systems.
• Look closely at expenditures on a monthly basis to check that items have been correctly coded.  Mistakes happen, and this can be challenging to track back if you do not review your transactions regularly.
• Meet with your financial officer to gain an update on university policies and expectations as to financial management, particularly if you are using a corporate credit card.
• Look carefully at your expenditures to identify costs that could be reduced. You may, for example, be buying from an expensive source or could be purchasing in bulk to reduce shipping costs.  There might also be potential to share costs with other projects. 

3.7 Reporting system

Having understood the purpose of budgeting and the requirements for preparation, it is also vital to have a good reporting system. The characteristics of a good system are that it:

• Identifies variances by budget heading
• Provides an explanation of:
• The reason for the variance
• Action being taken to correct any adverse variance
• Time required to effect corrective action
• Shows a revised annual forecast (actual to date plus budget to the year end)
• Shows minimum delay.

You will greatly benefit from an understanding of your reporting system, even if you do not personally handle the regular processes. Financial literacy is critical to good management. 

 

3.8 Monitoring and control

Having prepared a budget it should not be forgotten until the end of the project. It is an important management tool and should be used to compare actual results with the budgeted forecast. By comparing actual and budgeted figures any slippage or deviation from the plan can be swiftly identified and corrective action taken. If you have support staff available to conduct this task, you need to exercise oversight of their work, as you hold the authority to approve variations within the terms and conditions of your deed, agreement, or contract. 

Without an effective monitoring procedure, adverse variances can continue to the point where your project may be closed well before its completion date. This will have many negative consequences for your reputation, your staff, and your research. It is important to monitor the budget regularly.  A monthly statement is a good management practice to get into.

Of course, certain variances may be outside the control of the research team, e.g. an unexpected rise in the cost of materials due to changes in exchange rates. In the case where the variance is material and may even get worse, a revised forecast should be prepared to show a new budgeted level of expenditure. The main purpose of this is to ensure that there are no surprises at the year end or at completion of the project. Over-expenditure on research projects must be funded by your faculty, so it is important that such items can be identified early and your supervisor advised accordingly.  In some universities, funding will not be made available. Address funding variances quickly. Should there be an adverse variance that will affect the project, the plans must be amended to ensure that it comes back on course. This may mean that other budgeted expenses are delayed or cancelled or that you will need to seek alternative sources of revenue.