All projects have a common purpose. They are designed to deliver outcomes, whether they be improvements to customer service, increased sales, or operational efficiencies. Despite application of the most effective project management techniques and governance, many projects will still come under stress that can cause delays, quality issues, and unforeseen cost.
Solid financial management is increasingly being seen not just as a business case input, but as a blueprint that can be used to keep projects to scope and budget, and to help identify and quantify project risks and issues. It also enables teams to more effectively manage these risks and issues and increases the likelihood of a successful project.
Here are three key principles of sound financial management that can help your teams deliver on the outcomes their projects attempt to realise.
Realistic cost estimation
Optimism is a key ingredient of an effective project team. However, when it comes to costs, there is a drastic need to be realistic. Develop a common method of estimating costs based on previously implemented projects. Always include your resource requirements, equipment services and third party costs. Work closely with your vendors on defining clear rate cards for services that take the guess work out of cost estimation. Using the cost per unit calculation, estimate costs over specific project stages. This will allow burn rates to be determined for monitoring actual versus planned costs and enable you to easily monitor spend throughout the life of the project.
Understanding the forecast
The secret to a good forecast lies in the construction of a periodic spend profile. As project expenditure and burn rates will always vary from one project to another, department or company-wide financial analysis will provide a macro view of expenditure versus allowance. This will allow finance to assist project managers with resource allocation as project risks and issues arise.
Controlling & monitoring
Controlling & monitoring actual spend to forecast should be done on at least a monthly basis, to ensure project expenditure isn’t too far out of control. It will serve as an early warning system for when budgets are at risk of over-running or, conversely, delivering underspend. Once monthly actuals are known, it is important to proactively analyse any variances to the forecast. Appropriate decisions can then be made to reforecast costs that have not yet materialised and action any overspending.
A good financial management framework, based on the principles outlined above, is of vital importance to a successful project. It is the key to not only limiting cost overruns, but ensuring the business case is realistic and can be revalidated throughout the life of the project. This will in turn enable effective decision making by the sponsor, and lead to more successful project outcomes.