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

Project financial management

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:

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.

Maximize resource utilization now

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