Failing to implement effective project financial management could leave your business’s finances in trouble. Data from Wellingtone shows that only 43% of organizations complete projects within the scope of their fixed budgets, always or most of the time. That leaves the majority of organizations struggling to complete projects without digging into their financial resources unplanned.
The research shows that many projects extend the scopes of their fixed budgets and end up costing organizations more than they bargained for. But why does this happen? The answer to this question lies in how effectively a business handles its project financial management processes. This includes the planning, budgeting, tracking and monitoring of project financial performance indicators.
In this article, we’ll explore the nuances of effective project financial management so that you can streamline your own processes.
What is Project Financial Management?
Project management is a set of processes and tasks organizations use to successfully and strategically execute projects from start to finish. Project financial management is a crucial aspect of project management as a whole. Often referred to as project accounting, project financial management aims to streamline and optimize a project’s financial needs and facets, including revenues, profits, and costs.
To ensure every project you undertake is completed on budget,your project financial management approach should combine:
- Funding techniques
- Expense management processes
Proper project budgeting is arguably the most essential one of these responsibilities. It lays out a robust framework that your business can work from to effectively allocate financial resources within the confines of your budget and estimations.
The ABCs of Project Financial Management
Use these definitions to enhance your knowledge of project financial management and improve your business’s chances of achieving long term financial success.
Every project that your organization undertakes is unique. It brings with it its own set of risks, benefits, challenges, and needs. Project accounting is the process by which business decision-makers and project managers keep track of costs and financial benefits, like revenues and profits. It also includes all other financial metrics associated with an individual project.
Project accounting is thus a form of accounting used to monitor all financial transactions made to support a single project. The primary aim of project accounting is to supply financial information that helps to manage and monitor the performance and progress of a project within the context of your available budget.
Project accounting is often used to identify projects and tasks that will have the most notable impacts on a business. Particularly in terms of ROI (return on investment). Project accounting seeks to minimize costs and budget overruns. In doing so, it ensures that projects remain profitable and produce a consistently high ROI for your organization and clients.
This form of accounting often requires a range of financial reporting responsibilities. These include:
- Expense reports
- Financial management of timelines and budgets
- Strategic management of project resources
The goal of project billing is to get your organization paid promptly and in full. Projects can often take long periods of time—months or even years—to complete. So, it’s good practice to bill frequently throughout the course of your project to streamline your cash flow and reduce your risk of non-payment.
Conversely, many clients prefer to pay when projects are complete and finalized in order to minimize their own risk. You can strike a balance between these needs by developing a project billing scheme that all parties involved approve of and commit to. Projects can be billed in installments at set milestones, or billed monthly based on your activity reports. Your project billing structure can be personalized in any way, as long as you and your clients are comfortable with it. It will form a vital part of your overall project financial management strategy.
Budgeting allows your business to lay out a realistic, data-based budget of all of your projected expenses and earnings. The simplest way to create accurate budgets for projects is to use an automated project budgeting service or software platform to set budgets that you can adjust as and when you need to.
You can use an automated budgeting service to set granular budgets and targets for specific resources, project stages, and projects as a whole. Most modern systems offer custom controls that allow you to alter pricing models and project rates, include staff leave costs and contingencies, and add other individual factors that could affect your project budgets.
McKinsey estimates that if project owners continue on their current trajectory of constant budget overruns, global capital spending could reach $82 trillion by the year 2025. Project cost control, also known as cost management, is a process by which project managers identify and reduce expenses to maximize the profitability of a project. Cost control can take place at a project level or across an entire organization. But as a project manager, you would use its practices to manage your resources and reduce overspending wherever possible.
Most businesses use cost control reporting tools to identify excessive expenses within a project’s budget. Say, for instance, that a freelance web developer you’ve hired for a new project is taking longer than anticipated to develop a usable website. When you identify this ongoing cost using the right reporting tools, you can take action by hiring an in-house web developer on your next project to minimize costs and improve your efficiency and project profitability.
Project estimation provides you with an overview of how long an individual project will take and what types of resources it needs. Ut also outlines how much of each resource is required and which deliverables must get met to complete a project successfully.
Essentially, a project estimation is an informed guideline for the costs, resources and time a project will require from its inception to its completion. The majority of project estimations use past project data and automation to make informed predictions about the resources a current project will need. This past data could include budgets and timelines from similar tasks, past experience in project estimation, and past stakeholder needs to assess the requirements of a current project.
This information is then paired with information specific to your current projects, such as budgets and client expectations, to structure your efforts and produce more profitable results. Project estimation takes into account factors like cost, scope, and time. It can be performed according to a range of estimation techniques like top-down estimation, bottom up estimation, and three point estimation.
Depending on the nature of your business, there are many external sources of funding available to get your project off the ground. If you’re seeking funding, one of the first points any investor will look at is your financials. You’ll need to have all your accounting in order, your taxes must be correctly filed, and you’ll need forecasts and projections based on solid data and research.
Some of the most common sources of funding are equity, loans, investors, private financing, grants, and funds. Short-term sources of project funding include overdraft facilities and loans from financial institutions and private investors. Long term sources include debenture loans, venture capital, share capital, retained profits, share issuance, and project grants and funding.
Careful project planning is essential for the success of any type of project. It’s delivered in the form of a detailed document that describes exactly what your organization needs to manage and complete a project.
During the project planning phase, your team will explore a range of planning phases and requirements. This includes:
- Project objective
- Scope of work
- Stakeholder outline
- Constraints and limitations
- Costs and risk management outlines
- Communications and quality management plans
- Change management plans
You may also wish to create a project charter early on in your project’s life cycle. This brief document will give you an overview of your project scope, timeline, milestones, deliverables, key stakeholders, constraints, assumptions, and project summary to guide your team’s efforts.
The simplest way to create a concise project plan and charter is to use templates unique to your industry and project nature. You can easily find these templates online. You can also use an automated project management tool to complete the planning phase in a structured way.
Tracking Financial Metrics
Tracking your project financials is arguably one of the most critical processes in the greater project management task. Many project managers look at a wide range of processes to monitor their project’s financial metrics. But nowadays, most managers seek out a single, central tool to achieve this instead. However, using numerous spreadsheets and documents can complicate your financial management responsibilities and extend the risk of error. Fortunately, there are more effective solutions available to simplify the process.
Using a project financial management software tool can help you to effortlessly track revenues, project project cash flow, assess earned value and profit margins, and more. All from a single dashboard. These software platforms use the best key performance indicators, including profitability KPIs, efficiency KPIs, valuation KPIs, liquidity KPIs, and leverage KPIs. This gives you a clear and accurate representation of your project’s financial standing.
Project financial management requires a complex and nuanced approach, considering a wide range of factors that could affect your project’s profitability and overall success. The above overview should give you a more detailed idea of the financial ABCs of project management, from accounting to budgeting and cost control to estimation, planning, and tracking key financial metrics.
Simplify your project financial management responsibilities by using a complete project management solution like Nutcache. You can track your work hours across projects, measure your productivity, use KPIs to stay on budget, and remain aligned with key project deadlines to keep your clients satisfied with ease!