Tips to Financially Manage Your Projects & How to Stop Them from Going Over-Budge

Projects running over budget? You aren’t alone.

If we go by numbers, 85% projects go over budget. That’s a high number, isn’t it? A number of reasons could contribute to this, but if projects keep running above the stipulated budget, then they are definitely cutting into the profit margins. We also know that prudent finance management is the hallmark of great organizations. So, how can one reduce the chances of projects getting completed without additional overhead costs?

It starts with understanding the importance of financial management in projects and then learning how to manage, track and analyse the numbers. While this may sound very difficult, it’s actually not.

We’re here to help you out. Learn about the financial management aspect of projects and what you can do to master the project figures and minimize budget inflation.

What is Financial Management?

Financial management in projects is sometimes referred to as project accounting or project financial management. What does it mean? Project financial management is the process that brings together the control over a project’s financial aspects — to ensure that costs, revenue, and profit are inline with the deliverables.

Simply put, project financial management identifies all the “number” requirements for a project and how to manage them over the project cycle.

Why Do You Need To Focus On Financial Management of Projects?

One of the main reasons why finance is an essential part of project management is because every project needs to be planned according to a budget. The process of financial planning also enables the company to organise and manage multiple projects efficiently and drive business growth.

A few other benefits of managing your project finances are:

• Provides Key Metrics & Roadmap

  Without a map, reaching a new destination can get difficult. We can end up taking a longer route, or get lost. The same can happen with a project when there are no financial metrics or one doesn’t have the right financial metrics. Many times, financial figures are spread across various spreadsheets and emails and tracking and accounting for all the expenses in such cases has a high error-rate.

  Project accounting gives you key metrics to track and a financial roadmap for successful project completion, all in one place. By knowing which metrics to track, you get a grasp on where the project stands in the pipeline and can also safeguard it from going over budget.

• Aids in prioritisation of Projects

  If projects are assessed and planned with financials, then your company will be able to identify and prioritise the ones that will generate highest return on investment (ROI). Projects that can have the biggest impact on business will get the necessary resources and attention they require so the final deliverable to clients meets or supersedes expectations.

  Understanding the ROI of projects will also enable the company to identify the right profile of customers. By recognising the demographics of the “ideal” customer, you can tailor your marketing and sales program to attract and convert them. You can also ensure you assign the top resources for the high-priority projects.

• Decreases Cost Overruns

  Financial project accounting will help avoid cost overruns. This is how it works. When you financially plan for a project, you’ll be prompted to dig into getting almost exact figures of costs instead of just guessing them. Keeping a tab on the actual costs as the project progresses will help you reduce any cost variances and keep a tab on outgoing expenses.

How To Manage Project Financials?

Number crunching and analysis can bring a lot of fear in many. 49.5% of project managers reported that managing costs is the biggest project management challenge they face. But it doesn’t have to be all doom and gloom. There are a few ways to get a hold of your project’s finances without getting a CPA degree.

1. Track the right financial metrics

   If you aren't capturing and measuring the right metrics, you are setting yourself up for failure. The first step towards efficient financial project management is to identify and track the right financial metrics. Key metrics to track are

   • Actual Cost (AC): How much money has been spent so far. Calculate it by adding actual costs of all expenses.
     Actual Costs = Total Costs of Project Per Time Period x Time Period
   • Earned Value: Cost of work performed. It assigns a value to the work you have completed so far in a project.
     Earned Value = % of work completed / total budget
   • Cost Performance Index (CPI):Used for making accurate budget estimations.
     CPI = Earned Value / Actual Costs
   • Cost Variance (CV):Difference between project’s planned budget and the actual costs within a defined timeframe. If the project is exceeding the planned budget, CV will be a negative figure.
     Cost Variance = Budgeted Cost of Work – Actual Cost of Work
   • Schedule Variance:Provides an overview of how on-schedule your project is. It is the budget cost of work completed minus the budgeted cost of scheduled work.
     Schedule Variance = Budgeted Cost of Work Performed – Budgeted Cost of Work Scheduled
   • Gross Profit Margin:It’s what your company has earned from the project.
     Gross Profit Margin = Total Profit - Total Costs x 100%
   • Return on Investment (ROI): Determines the specific benefits (read: cost savings and profit) from a project’s costs such as training, overhead, and resource charges.
     ROI = Net Benefits/Costs x 100
2. Document Expenses
   

   Good project financial management comes down to being meticulous about tracking expenses. Many organisations use a mix of excel spreadsheets, emails or a legacy accounting system to track where the money is flowing. These methods aren’t conducive when you are running multiple projects — expenses can often go a-miss.

   Investing a resource project management system can help track expenses and give you a snapshot of costs in real-time. 43% of project managers want a project management tool that includes budgeting. Using the right tool can also give you a competitive edge.

3. Set Cost Baseline
   

   By setting a cost baseline, you are setting an estimated project budget that calculates the overall costs of a project for a defined timeframe. This is also known as time-phased budgets. With a cost-baseline you can evaluate the revenue you are earning from a project.

   To set a cost baseline, you need to look at:
   • Scope of work: what all is required to be completed within a defined time frame.
   • Resource costs who and what is required to complete tasks and how much are associated costs (salary, overtime, materials).
   • Contingency reserve what to do if there are unexpected expenses, how much budget is allocated for that?

Why Going Over Budget Is Riskier Than You Think

The bottom-line is that even if a project is delivered on time, but at a higher cost, a project can’t be labelled successful. Constantly overrunning the budget will negatively impact the company’s profitability.

By implementing a resource allocation system that includes financial metrics, you can set your projects up for sustained success. eRS, eResource Scheduler, is one of the top resource allocation softwares for projects. Why? Our resource management tool provides decision makers with all the key project financial metrics and reports, in real-time. Furthermore, these reports can be customised and tracked as per your needs.