Managing a project’s finances is essential to successful project delivery. Yet, only 34% of projects are completed mostly or always on budget. That means nearly 66% of completed projects are within their planned budget. That’s a lot of financial failure.
You probably already know how important a project’s finances are. Do you have the knowledge and tools to lead a successful project? Whether you’re a seasoned project manager or just starting, you’ve come to the right place to learn.
Here’s what we’ll cover in this article:
- What is project financial management?
- Why is project financial management important?
- 5 financial challenges project managers face
- 6 ways to improve project financial management
Let’s get started.
What is project financial management?
Project financial management is the process that controls a project’s expenses, revenue, and profit. The critical aspects of project financial management encompass planning, estimation, budget allocation, securing funds, expense control, and invoicing.
Financial management begins with creating a budget. After establishing the budget, the project manager (PM) is responsible for handling any adjustments throughout the project’s lifecycle.
Your main goal is to complete the project within the approved budget. (And on time and within scope, of course.)
Why is project financial management important?
The importance of a project’s financial management can’t be overstated. Here are four benefits of effective financial management:
1. Financial management keeps your project on track
Over 55% of PMs admit projects fail because of cost overruns. Managing your project’s finances keeps the whole project on track by establishing clear roadmaps and milestones.
Regularly monitor your financial data to identify and correct deviations from your approved budget, timeline, or resource allocations. Like a ship’s anchor, financial management keeps your project stable. Using accounting software takes the guesswork out of your process.
2. Financial management optimizes your human and physical resources
Accurate tracking and management of your project’s finances help you allocate and use resources appropriately. With this financial data, you can identify areas where resources may be underutilized or overutilized.
This allows for adjustments to achieve better efficiency at each project phase.
Optimizing your resources reduces physical waste, contributes to overall cost savings, and improves project profitability. It will also boost team morale, reduce staff burnout, and build momentum for future projects.
3. Financial management helps you manage risk
Financial management is crucial in identifying, assessing, and mitigating potential financial risks. With continuous monitoring, you can detect early warning signs of cost overruns, funding shortages, or unforeseen expenses.
You should also consider investing in tools or services that will help you mitigate the risk of unforeseen events.
This allows you to be proactive rather than reactive in your risk management strategies. You may see the need to implement contingency plans or renegotiate contracts sooner rather than later to help you stay on or get back to budget.
4. Financial management fuels future business growth
Your business growth is bigger than a single project.
Exploring new markets, building investment partnerships, and growing your prospect pool through email marketing are critical elements of your growth strategy.
With all that happening, it’s easy to ignore the critical place of projects. However, project success is critical to business profitability and success. A solid track record of completing projects on budget enhances your company’s reputation, making you more attractive to new clients and investors.
5 financial challenges project managers face
The only thing certain about a project is uncertainty. That’s especially true when it comes to managing finances. From swelling expenses due to scope creep to rising inflation costs, project managers must be ready for the unexpected.
You can’t predict what will go wrong, but preparation helps. Here are five common financial challenges to remember for your next project.
1. Inaccurate project forecasting
Accurate forecasting is crucial for project financial management.
Even the most experienced PMs might feel like it’s elusive. You may frequently lack historical data, have faulty assumptions, or the client may request something new out of the scope. In some projects, you may be a victim of economic change.
Consider how many construction companies’ supply chain was affected during the COVID-19 pandemic.
Addressing these challenges demands data-driven analysis, effective communication, and proactive risk management to ensure forecasts align with project realities.
2. Insufficient financial tracking
A common problem for PMs is tracking too many financial metrics or the wrong ones.
Monitoring incorrect or irrelevant metrics adds to the already complex nature of project decision-making. The key lies in identifying and focusing on the most relevant financial indicators aligned with the project’s and company’s goals.
Knowing what to track simplifies data analysis. This reduces the risk of overlooking red flags that can get lost amid excessive data.
3. Incorrect metric calculations
Flawed metrics skew performance assessments, leading to misguided decisions. This can be detrimental to your project.
For instance, miscalculating key performance indicators (KPIs) such as return on investment (ROI) or cost variance (CV) can obscure a project’s financial health.
Don’t leave this to chance. Project management software automatically tracks every calculation, so you don’t have to worry about manual entry. Financial management programs also help with forecasting and reporting.
4. Inadequate resource allocation
Resource allocation is all about operational efficiency.
When you misjudge your resource allocation, your project will run like an engine low on oil. Your team will experience friction, leading to frustration and burnout.
Inadequate resource planning, including staffing, funds, or equipment, can lead to project delays, cost overruns, and compromised quality.
5. Improper risk management
Failure to identify, assess, and mitigate potential risks can severely ramp up your expenses and delays, ultimately leading to project failure.
With 41% of companies reporting significant risk to projects in the past year, it’s not a matter of if but when you’ll have to navigate risk.
For example, ignoring technical feasibility risks in a software development project may lead to costly rework and missed deadlines.
But when implementing a risk management process, you’re being proactive and structured in your decision-making. Ultimately, this safeguards your financial interests.
6 ways to improve project financial management
Want to give your finances in project management a boost? Consider the following six tips.
1. Plan your budget accurately
Accurate budget planning is the foundation of effective project financial management. If your budget is off—even just a few dollars here and there—by the end of the project, you will miss the mark widely.
Take the time to thoroughly understand your project’s requirements, estimate costs realistically, and identify potential risks.
A well-crafted budget is a roadmap for allocating resources and controlling expenses throughout the project lifecycle.
Using project management software will help you plan an accurate budget.
2. Track the right financial metrics
Once your budget is accurate and approved and the project begins, you’re ready to track metrics. But you need to track the right metrics.
Here are seven metrics every PM needs to track along with their formula. Your project may not require each, so carefully choose what’s appropriate for your situation.
Actual Cost (AC)
This represents the actual expenditure on a project. Calculate it by summing all expenses over its duration.
AC = Total Costs per Time Period x Time Period
Earned Value (EV)
Also known as Budgeted Cost of Work Performed (BCWP), EV reflects the value generated by the project expenditures to date. It provides a measure of project performance against the budget.
EV = % of Completed Work (Actual) x Task Budget
Cost Performance Index (CPI)
CPI is derived by dividing the earned value by actual costs. It helps you create precise budget estimates.
CPI = Earned Value / Actual Costs
Cost Variance (CV)
Cost Variance signifies the variance between planned and actual costs within a defined timeframe.
CV = Budgeted Cost of Work – Actual Cost of Work
Schedule Variance (SV)
SV compares the budgeted cost of work completed to the budgeted cost of scheduled work. SV tells you if a project is ahead of or behind schedule.
SV = Budgeted Cost of Work Performed – Budgeted Cost of Work Scheduled
Gross Profit Margin
Gross Profit Margin measures your project’s gross profit. To calculate it, subtract the costs you spent from your total profit. To find a percent, multiply your answer by 100. The higher your gross profit margin, the more profitable your project is.
Gross Profit Margin = Total Profit – Total Costs
Return on Investment (ROI)
ROI measures the benefits relative to project costs. This formula evaluates the project’s profitability and efficiency.
ROI = (Net Benefits / Costs) x 100
3. Document everything
Comprehensive documentation ensures transparency, accountability, and compliance for your project. For finances, this is especially vital.
Detailed documentation cultivates a culture of responsibility among team members and ensures adherence to your team’s expected norms for communication. It also gives stakeholders insight into the project’s financial trajectory.
You can use accounting software to manage receipts and documents online (e.g., invoices).
4. Use project financial management software
Tracking a project’s progress in Excel isn’t sufficient—that’s a hindrance to your project’s success.
With more businesses moving toward automation with inventory replenishment, live chats, payroll, and more, why should projects be any different?
Software tracks everything in one place, creates dashboards to display project data visually, and automates workflows, notifications, and reminders for your team and stakeholders.
Software also enhances team collaboration with instant messaging and document management tools. A good project management software typically integrates with other communication tools your company may use (like Google Docs, Slack, etc.), and most allow you to share or request files from clients.
5. Establish and focus on your project ROI
Is your project profitable for the company? That’s what ROI is all about, and that’s what your stakeholders care about.
Tracking and analyzing ROI during your project’s lifecycle allows for course corrections or adjustments to improve returns. Use the formula above to calculate this throughout your project.
Maximizing ROI ensures that resources are utilized efficiently and that projects contribute positively to your organization’s bottom line.
6. Put a change control process in place (and don’t ignore it)
No project goes precisely how you expect. So plan for change! That’s where putting a change control process comes into play.
A change control process systematically reviews and approves proposed project scope, schedule, and budget changes.
By establishing clear protocols for change management, you decide ahead of time what you will do when potential risks arise.
This can mitigate scope creep, budget overruns, and schedule delays. Additionally, a well-defined change control process ensures that all stakeholders are aligned and informed, which leads to smoother project execution.
This is not intended as legal advice; for more information, please click here.
These views are made solely by the author.
