Financing the Future: Financial Mastery in Project Management

Finance is the lifeblood of any project. Mastering budgeting, cost control, and financial analysis is essential for success as a project manager. This article explores techniques for financial mastery, enabling you to optimise funds, prove ROI, and finance the future through sound project management.

Introduction

Every project involves financial planning, funding allocation, and cost management. As a project manager, you must forecast, track, and control finances to ensure budgets are optimised, costs are contained, and value is delivered.

With sound financial practices, you can justify projects, manage stakeholder expectations, and make data-driven decisions about scope, resources, and objectives. Financial mastery leads to improved reporting, forecasting, and performance.

Budgeting Basics

The budgeting process establishes the approved funding for your project. This involves:

• Estimating Costs: Develop accurate estimates for labour, materials, equipment, facilities, software, etc. If your project is spanning multiple years add CPI to accommodate inflation.
• Determining Contingencies: Pad estimates with contingencies to account for uncertainties and known risks. This is a very important step and often overlooked.
• Managing Reserves: Set aside reserves to fund unplanned changes.
• Developing a Funding Plan: Define how you will finance the budget - capital, operating expenses, loans, etc.
• Securing Approvals: Present the budget and funding plan to sponsors for approval.

With an approved budget, you have the financial baseline to execute the project. This limits spending to what is authorised. The budget also helps track performance.

Controlling Costs Through Variance Analysis

As you execute the project, continuously monitor actual costs against the budget via variance analysis. Key variances include:

• Cost Variance (CV): Budgeted Cost of Work Performed (BCWP) - Actual Cost of Work Performed (ACWP). Measures cost overruns/underruns.
• Schedule Variance (SV): Budgeted Cost of Work Scheduled (BCWS) - Budgeted Cost of Work Performed (BCWP). Measures schedule adherence.

Analyse negative variances to identify root causes (e.g. scope changes, inaccurate estimating). Take corrective actions to control further overruns. Report positive variances as savings.

Proving Value Through Earned Value Management

Earned Value Management (EVM) relates to budget, schedule, and actual costs to assess project performance. Metrics like CPI, SPI and TCPI quantify efficiency.

• Cost Performance Index (CPI): Measure of cost efficiency. Above 1 is good.

CPI = BCWP/ACWP

• Schedule Performance Index (SPI): Schedule efficiency. Above 1 is good.

SPI = BCWP/BCWS

• To-Complete Performance Index (TCPI): Projection of cost performance needed to complete within the remaining budget. Equal to or Below 1 is good. 

TCPI = (BAC - BCWP)/(BAC - ACWP)

EVM provides early warning signs of issues. It also helps forecast final costs so corrective actions can be taken.