Financial management is an integral part of project management. Managing project finances is important to keep projects on track and make them successful.
Project Management lifecycle consists of five stages –conception and initiation, definition and planning, execution, performance and control, closure. One of the most important phases of this lifecycle is finance planning and management! Every project runs on a fixed budget and it is important to be diligent during every step of the process.
In this write-up, we have highlighted the main factors that need to be kept under check to avoid falling into traps during project planning and execution.
Project expenses estimate
The first and the foremost step in finance management is project expenses estimation. However, estimating the budget for your new project is not as easy as it sounds. Before zeroing down on a final budget, it is necessary to forecast the amount of people working on the project, equipment, materials, and miscellaneous costs, needed to deliver the project.
This will give you a clear picture of the exact ‘cash flow’ that you can use to work on the project on a weekly basis.
Keep track of resource usage
Resource finance management is an area that most managers don’t consider while tracking their project expenses. Having a regular review of your project’s budget can save you from budget overruns. However, in case of resources, review of the project plan at regular intervals is necessary. Project managers should review the number of people working on a particular project weekly, and decide whether the current resources are needed for the future processes as well or not.
Also, it is necessary to regularly check whether the current resources are fully utilized and that the resources with particular expertise are working in the said areas. Having additional or not fully utilized resources in your project team can directly affect your budget. Thus, have a weekly update on the same.
Outsourcing projects need to be given a thought
One of the approaches that most managers follow is outsourcing projects to external vendor. However, this process can prove to be beneficial to the project, only if it is managed properly. Before appointing any third party vendor, it is necessary to check the actual working cost and turnaround time. In most cases, hiring a third-party vendor will save you of getting new resources on board and training them.
You can negotiate prices with outsourcing firms to improve the commercials at both your ends. You can have an audit across your various sectors to understand if there is any need to include additional outsourcing or off-shoring arrangements.
Identify your high-cost areas
In most projects, one process pulls all the money than other processes. In most IT companies, 85 percent of the total spend is on maintenance activities. This leaves very little budget for innovations and other related activities. This will not only hamper the progress of the company but also hamper its market image. This is the exact reason why project managers should identify the high-cost areas in their project. Once identified, it is important to plan some steps to rectify this spending or find an alternate approach that can lower this spending amount.
Have backup/contingency funding
Just in case, your project spends overrun the set budget by some percentage, it is helpful to have a contingency fund. Contingency fund is some money from the budget, kept aside at the start of the project to tackle unforeseen expenses. In order to zero down on a particular number for this fund, you should calculate the risks involved in the project.
The higher the risk, the higher the contingency fund budget! If you are stuck with all these calculations, you can straight away take it to be 10% of your project budget. Finally at the end of the project, if this contingency fund is not needed, you can give it back to the company but make sure not to calculate this money in profits. This is not an earning but only an additional backup fund for emergency purposes.
There are numerous project management software available in the market. However, if you are not looking into investing in buying one right away, you can create a spreadsheet template to track your finances. Keep on reviewing this tracker weekly to understand the project expenses. However, if at any given point, you realize the budget has overrun, you can try out realignment option. You can reforecast the expenses and resubmit the new budget for approval.
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However, if this doesn’t work out (in most cases it won’t) then you need to start reallocation of funds. Identify the processes are not-so-important and reduce the finances assigned to the same. Alternately, if you are running a marketing project, you can look at the channels giving you minimum returns and cut down on the budget allocated to this. Small realignments in the allocation pattern can help you get back on track.
Project managers should carefully manage of the project work and avoid unplanned creeping in that increases billable hours and pushes the budget out of control. The project budget is a living part of the project and project managers should review the progress and finances of the project.