Picture it. You've experienced increased project costs that you didn't plan for. Now, you don't have the financial resources to complete your project. While many things can cause minor setbacks in projects, there's nothing that can derail a project like your finances.
Project financial management means managing a project's finances from initial planning and budgeting to reporting. And in our experience, optimizing your project's finances will result in better outcomes.
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Key Takeaways ● The key components of successful project financial management include budgeting, cost control, forecasting, financial reporting, and risk management. ● When tracking financial health during a project, you should watch KPIs such as cost variance, budget adherence, ROI, cash flow projections, and schedule variance. ● To improve your project finance management, you must set realistic budgets, plan for scenarios, implement financial reviews, encourage accountability, and use financial tracking tools.
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Table of Contents:
- Key Components of Project Financial Management
- Challenges You May Face Within Project Financial Management
- Finance Project Metrics You Should Track
- Best Practices for Project Finance Management
- How Technology & Software Solutions Help You Optimize Your Process
Key Components of Project Financial Management Project
Project financial management is a critical process that ensures you have the financial resources to see any project through to completion. The key components of project financial management span from budgeting to risk management.
Budgeting
You must establish clear, detailed project budgets during the initiation phase. Budgets should include resource allocation that strategically aligns with project priorities and goals. But you shouldn't stop at what you can see. Be sure to include contingency reserves for unforeseen expenses.
Cost Control
For the best ROI, cost control measures are non-negotiable. You must monitor expenses closely and continuously, comparing them with your approved budget. As you do so, take corrective action on variances to avoid cost overruns. Cost-tracking tools can help you see expenses in real-time and uncover potentially damaging spending trends.
Forecasting
Forecasting is often viewed as something you do once at the outset of your project. It's not. Instead, you should update your financial forecasts regularly to reflect changes in project scope, timelines, and other external factors. To build accurate forecasts, leverage historical data and predictive analytics to help you determine what the future might hold. It's also important to incorporate cash flow projections to anticipate future funding needs.
Financial Reporting
Financial reporting details whether your project's financials are in good standing while highlighting potential pitfalls. You should provide all key stakeholders with transparent, timely financial updates at various stages of your project to keep things moving as expected.
Use standardized reporting formats for consistency and compatibility. For example, you may want to compare your current finances with those at the beginning of your project for continuous forecasting. Critical metrics to include in your reports include budget-to-actual comparisons and project burn rates.
Risk Management
All projects come with financial risks, such as scope creep. However, identifying and preparing for these risks ahead of time will help keep projects running smoothly.
Early on in the project lifecycle, take time to identify all potential risks. Develop risk mitigation plans for each risk to avoid potential overruns or delays. As part of your overall budgeting process, use identified risks to establish a risk reserve so that finances are available should you need them.
Challenges You May Face Within Project Financial Management
Have you heard of the Millennium Dome? This structure, now known as the O2, is located in Greenwich, London. Finished in 1999, the dome cost a staggering €789 million (around $830 million) to build, far outpacing its original budget of €758 million (around $797 million).
After opening on December 31st, 1999, the Millennium Dome only lasted a year after failing to attract the number of visitors forecasted to recoup costs. The dome is a clear example of the importance of financial management within projects.
You may not be planning a project of this magnitude. However, all projects can fall victim to the following challenges. Luckily, there are solutions if you implement the components of project financial management.
Cost Overruns
Challenge: Cost overruns happen when poor planning or unforeseen issues cause costs to exceed your budget. The Millennium Dome is an excellent example of a cost overrun in the millions.
Solution: Developing realistic budgets that include contingency funds will help you prepare for seen and unseen costs associated with your project. And implementing strict cost-tracking measures enables transparency, helping you pinpoint areas of spending that threaten your project's bottom line.
Inaccurate Forecasting
Challenge: Often, forecasts fail to account for changes in scope or unexpected project delays. Unfortunately, this may halt project progress by draining your budgeted resources.
Solution: Instead of forecasting just at the start of a project, use rolling forecasts. Regularly update your forecasts with the latest data for accuracy. Rolling forecasts help you make more informed decisions about your project.
For example, they give you an accurate view of what resources you're missing for the next phase of your project. This helps you allocate resources effectively, keeping your project moving forward.
Resource Allocation
Challenge: Misallocated resources will lead to project inefficiencies and additional costs. Improper allocation also tends to result in employee burnout and subpar deliverable quality.
Solution: To combat misallocation, conduct thorough resource planning at the outset of your project. You'll also want to adjust allocations based on real-time needs.
Finance Project Metrics You Should Track
To gauge the effectiveness of your financial project management, you must track your KPIs. Tracking KPIs gives you a real-time view of your project health and helps you make changes on the fly to ensure your project is completed on time and within budget.
Some of these KPIs include:
● Cost variance: This KPI measures the difference between the budgeted and actual project costs. Cost variance is a key indicator of project health. For example, a positive cost variance means your project is under budget.● Budget adherence: This KPI tracks the specific percentage of the budget you've used. The percentage helps you determine if you're using your resources in the best way. For example, it can pinpoint if your spending exceeds your budget and where to cut back.
● Return on investment (ROI): This KPI evaluates the financial return of your project relative to its costs. Tracking ROI has many benefits. For example, forecasting ROI at the start of your project can help you determine whether to move forward with a project or table it.
● Cash flow projections: This KPI monitors your cash inflow and outflow to ensure sufficient funding at all stages of your project. Cash flow projections simplify resource management and help you make financial decisions about your project.
● Schedule variance: This KPI compares actual progress against planned timelines. By tracking schedule variance, you can identify the financial impacts of project delays.
Best Practices for Project Finance Management
In our experience, there are key financial best practices organizations should follow for project success.
Set Realistic Budgets
Budgets play a key role in projects from planning to completion. For example, a budget helps projects progress by explaining to stakeholders what's required and when, ensuring funds are available.
Effective budgets must be realistic and based on comprehensive project plans. They should also include contingency reserves in preparation for potential project risks. After determining your budget, you'll want to collaborate with stakeholders to validate your assumptions.
Plan for Different Scenarios
Scenario planning means conducting "what if" analyses to anticipate potential financial outcomes under different scenarios. This process goes hand-in-hand with creating realistic budgets.
Through scenario planning, you can create flexible budgets to adapt to changes in project conditions. This helps you prepare for anything that could hurt your budget and halt project progress.
Implement Regular Financial Reviews
As your project progresses, you'll want to schedule periodic reviews to assess financial health and address any variances in your budget. Regular financial reviews enable you to act fast on financial risks that may prevent your project from reaching completion.
These reviews also encourage cross-functional collaboration, aligning financial decisions with project goals.
Encourage Accountability
Everyone on a project team is responsible for its success. And we've seen the positive impacts of ensuring everyone knows their roles and responsibilities.
As you plan projects, assign clear financial responsibilities to project managers and team members. For example, determine who's responsible for processes such as financial reporting, stakeholder communication, etc.
We also recommend providing financial management training to all of your team members, not just finance staff. Through training, the entire team will learn how their actions impact the project at large.
Use Financial Tracking Tools
Manually tracking project financials is time-consuming and leaves the door wide open for costly errors. It also fails to give you the updated insights you need to keep projects within budget and on track.
Financial tracking tools, such as FP&A software, can help you monitor expenses, invoices, budgets, and other key information in real-time. Plus, many tools come standard with dashboards, enabling you to track financial performance quickly at a glance.
How Technology & Software Solutions Help You Optimize Your Process
We've helped many Fortune 1000 companies take advantage of software to optimize their financial processes, from ERP systems to financial reporting platforms. Software can also help you improve your project financial management through the following benefits.
Real-Time Tracking
Real-time tracking enables you to see the financial health of projects at any time. For example, tools such as SAP, NetSuite, and QuickBooks help you monitor your expenses and budgets across projects. Plus, many of these tools provide mobile access, helping your project managers visualize performance and make decisions from anywhere.
Advanced Reporting and Analytics
Want to see areas of improvement within your financials to support future project planning? Leaking resources and needing to uncover where? Data is the answer.
Tools like Power BI and Tableau provide financial data visualization so you can see trends and insights within simple dashboards. And tools like Adaptive Insights and IBM Planning Analytics offer predictive analytics so you can anticipate future financial challenges, stopping them before they halt your project.
Collaboration and Integration
For projects to move smoothly, collaboration across teams and departments is critical. All stakeholders should have access to the same data to make informed financial decisions.
Adopt platforms like Smartsheet or Asana to integrate your financial data into project management workflows. This can increase visibility and keep everyone moving toward the same goal.
We also recommend centralizing your data storage for easier access and reporting. Data integration tools such as Microsoft Azure and Informatica can bring your disparate data together.
Automation and AI-Driven Insights
Automation can eliminate the need for human intervention for more tedious tasks, eliminating errors and saving time. For example, you can automate repetitive tasks like invoice processing or expense tracking.
Workflow automation tools, like Jira and Zapier, can complete approvals and reporting automatically, keeping your project moving.
8020 Consulting Is Here to Support Your Project Financial Management
Effective project financial management takes focus: focus on managing resources, identifying obstacles, and ensuring projects reach the finish line without blowing the budget.
But internal project managers are often burdened by day-to-day responsibilities and unable to give their full attention to a project's finances.
8020 consultants have the financial focus required to accelerate your projects and push you toward your business goals without burdening your internal teams. Let us help you manage your project finances effectively, from planning through execution.
