A budget provides a kind of game plan for all operations within development. A budget can help the development team to meet its goals on time and efficiently, so that they do not have to go over budget and spend more money than they actually need to. Budget plans are usually made to ensure the team survives so they can plan where to use it, how to use it and how much revenue they need to gather in order to reach their target and make a profit. They are also used as a way to persuade potential investors that the company will do well and has everything sorted out. To create a budget, Variable costs, fixed costs and break even points need to be understood.
Variable costs
These costs are the expenses that can change overtimes. They can either increase or decrease and will never stay the same. An example would be if you are an ice cream man, the costs of flakes that you have bought could increase or decrease as the company that makes them can change their prices. Variable costs can always be expressed as a percentage of sales, so if the cost of flakes that sells for £1 is 60p (60%) then if you sell 10 ice creams with flakes, you will get £10 from sales and your variable cost would be 60% of that which is £6 so you will have made £4 profit.
Fixed costs
Fixed costs are costs which are not affected whether you sell your product or not. For example, for the ice cream van, fuel prices will not go up if you travel the same distance every day, nor will they go down. Rent is also an example as you are paying money to rent the building; they do not make you pay more if you sell more of the product. One way fixed costs would change is if you hire more employees. If you only have 1 employee, but decide you want 4, the fixed cost of wages would quadruple as the same wages would have to be paid but this time for 4 people but it would then stick at the new cost and not change at all unless you hire more or rent a bigger building for example. In a games developement studio, an example of fixed costs would be the wages for the team programmers. Their wages will not change depending on how well the game sells.
Break-even point
The break-even point determines whether you have actually made a profit or a loss. It is the level of sales where the gross profit is the same as the fixed costs. If you are on the break-even point, this means you have not made a loss or a profit, so you break-even. If the total is lower than the break-even point, you have made loss yet if it is higher, you have made a profit. Assume the fixed costs are £400. We have £1000 in sales and the gross profit % is still %40 as we made £4 profit in the Ice cream example. If we sell the ice creams for £1 each, we will need to sell 1000 of these to break even. If we sell more, we will have made a profit and any less we will have made a loss.
Monitoring
This is basically monitoring your budget and expenses to scan for differences and establish why they are there and whether they could affect the actual budget. It is important to monitor these things as you could be spending far too much money on something which could lead you to go over budget and disrupt development.
