The Money Files

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A blog that looks at all aspects of project and program finances from budgets and accounting to getting a pay rise and managing contracts.

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8 Tips for better benefits management

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Creating a stellar delivery organisation

Alternatives to prototyping

Digby Jones: An opinion on Europe and the economy
Categories: events

Digby JonesLord Digby Jones spoke at Synergy, PMI UK Chapter’s event for International Project Management Day earlier this month. Previously Director General of the Confederation of British Industry, he spoke about the economy and the financial situation that project managers find themselves working in.

“What is the tapestry against which we are all operating?” he asked, before going on to give us his answer on that.

He started with some statistics and said that the percentage of GDP in Shanghai in the private sector is bigger than all the UK’s major cities except London. “This, my friends, is Asia’s century,” he said. 800m Chinese earn under $2 per day, “and every one of them wants your lunch.” He talked about moving the wealth west into the rest of China and filling the vacuum left in the east with the work we do. Therefore, he argued, we should be focusing on what we can deliver to a growing nation of consumers, or in upskilling ourselves so that the work we do is not off-shored to skilled workers in China.

He said the same principles applied to India as well. Three quarters of the population in India work on the land, he explained. As education rates go up, and industrialisation reaches these areas on a much larger scale, this will change. He also explained that he didn’t see this competition as anything like a threat – instead it is an opportunity. “This is no threat, if we provide the stuff, and the services,” he said. “Brazil, India, China, they are all getting richer so we need to provide the stuff that they want to buy.”

Europe in the globalisation stakes

He talked about what he considers the flawed model of European economics (although he didn’t actually use that term). “What we do in Europe is dumb it down to the lowest common denominator so everyone can get a prize,” Lord Jones said. “Well, I’ve got news for you: to get a gold medal, someone has to lose. We might all be equal in Europe but the only race that matters is the globalisation race. We’ve got to move away from everyone being the same.”

The advantage of this is that we can take the best from every country instead of trying to even the playing field. For example, he said that, “delivery from middle managers is better in France than anywhere else.” He also spoke highly of Germany’s ability to deliver infrastructure projects and the benefits of our UK labour market. “So why don’t we use our labour market, the German infrastructure build model, France’s middle management delivery and standardise to that?” he asked. “That’s the tapestry against which we all operate.”

Synergy bannerLord Jones on the economy: the new normal

“This isn’t austerity,” Lord Jones said. “This is going to be normal. How are we going to live in a world where there wasn’t ever enough money and we’ve only just been told we can’t have it all?” That’s the challenge for all of us – not just project managers.

He suggested that there were three ways to get to grips with this new normal.

First, “We’ve got to get building projects,” he said. “We’ve got to make sure we equip the nation.” If we don’t build capacity, Lord Jones believes that the UK will move into the second tier of European countries. He said that was fine as a strategy if that is what the government wanted to do (although it wouldn’t be the sort of place he would want to live). He believes that we can invest in this sort of project even in times of economic difficulty because “infrastructure takes a while to produce and a while to pay for.”

Second, he advocated for a more efficient public sector. If we want the public sector to be more efficient, it is pointless saying work harder, he said. The answer is in smarter working practices. Adding value through innovation, qualifications and growing skills is key. One third of adults are functionally illiterate, he said. “We need an education system fit for purpose – children should be able to read, write, add up and use a computer by the age of 16,” he said, “or parents and teachers have failed.”

Third, he stressed the importance of leadership. “If you are going to deliver on projects, none of it happens without leadership,” he said. Leadership is not the prerogative of captains of industry and big wigs – it is down to you to lead your project team. “You are in a position to change someone’s life for better or worse,” Lord Jones said. “You can bring on or knock down. That’s what we need. Popularity is not what you are in leadership for.”

Lord Jones was a challenging speaker with some big ideas, and while inspiring at times and a good storyteller, it was certainly a ‘bigger picture’ speech. It was a good way to open the day. “Don’t you let anyone tell you that leadership is for someone else,” he concluded. Whether you agree with his views on the economy and Europe or not, I think we can all agree with that.

Posted on: November 22, 2012 01:57 PM | Permalink | Comments (0)

Finance teams: Accounts Receivable
Categories: accounting, video

 

There are a number of teams that make up a Finance department and in my last videos I have talked about the role of capital accountants and the general accounting team, and the Accounts Payable team. Today I’m going to talk about Accounts Receivable.

As a project manager you’ll probably have less to do with this particular department. It might be a team of people; it might be somebody who deals with Accounts Receivable as part of their role if you are in a small company.

Accounts Receivable is money that the company receives in so for whatever services you provide, whatever goods you sell, as money comes in from your customers, Accounts Receivable are the people who will deal with it, process it and make sure it is recorded properly.

As a result, unless your project is making money and it’s perhaps part of a programme and you are tracking income as part of a benefits realisation effort, you are not likely to have an awful lot to do with the Accounts Receivable team. However, I’m sure they are very useful people to know in their own right and it is a good idea to have an understanding of what they do so if you ever do need them, you know how to call on them.

Posted on: November 18, 2012 03:39 PM | Permalink | Comments (0)

Case study: planning for new energy sources
Categories: case study

Joseph Onstott, PMP, is the Budget and Cost Manager for the ITER project. He presented at Synergy, the PMI UK event for International Project Management Day, last week.

ITER was conceived in 1985 and is a global project with the aim of making fusion energy a reality. Fusion takes intense pressure and a temperature of 100 million degrees Centigrade to create a reaction, Onstott explained, so the technology is complex. In order to develop the technology to use in the power generation, a treaty was signed in 2006 between the EU, India, Japan, Korea, Russia, the US and China. “Sharing in the design and fabrication of components, each participating country could create its own infrastructure and propagate the technology around the world,” Onstott said.

The world uses enough energy per year to fill 28,218 supertankers. Per capital, that equals 24 light bulbs on for 24 hours a day every day but of course this energy consumption is not equally split. The US uses twice as much energy as the UK and 48 times as much energy as Bangladesh. As populations and incomes grow, and the developing nations expand their industrial horizons, world energy consumption will grow too. Onstott said that the prediction is that we’ll be using 50% more energy globally in 2030.

Currently most of our energy, 87% comes from fossil fuels (most of that is oil) and the remainder comes from nuclear power and other sources. Given that our reliance on oil is not durable, the fusion project aims to find an alternative way of creating energy – effectively by “bringing a star to Earth.”

A challenging project

The fusion project has a number of objectives.

Project objective:

  • To demonstrate the scientific and technical feasibility of fusion power.

Technical objectives:

  • To demonstrate the safety and environmental acceptance of fusion power
  • To integrate and test all the components.

There are also a number of project management and technical challenges on a project of this size.

Distributed manufacturing

Each member country is responsible for a piece of the overall system (which when put together is called a tokamak – the machine that does the fusion). The correction coils are being built in China. The cryostat is coming from India and other bits are coming from other technical teams around the world.

Tight schedules

The timeline for the project is long. After signing the treaty in 2006, construction finally began in 2010. By the end of 2014 the design and infrastructure will be finalised. 2015-19 is the test and construction phase. The system will be activated in 2020, so we are some way off having our household energy needs being provided by fusion power.

That might not seem like a tight schedule, but every country has to get their contribution ready at the same time.

Seven party collaboration

The seven treaty signatory states all need to work together. “One of the greatest strengths as a project is the ability to tap into the scientific know-how of our seven members,” said Onstott. However, this is also a challenge as each member has their own staff, budget, links to government and must come together to agree objectives.

Budget

Between 2007 and 2025 Onstott estimates the total project budget will be €2.5bn. As Budget and Cost Manager, it’s his responsibility to manage this mammoth budget. However, he doesn’t know the overall cost of the project as members provide their contributions in kind. Europe has provided an estimate of €6bn, so using that to extrapoloate, Onstott feels that the whole fusion project will cost €13-17bn.

Complex design and challenging assembly

The unit will be 30m in diameter and about the same in height when it is built. So far the building to house the Tokamak is underway and 493 antiseismic supports (see photo) have been put in place to protect against earthquakes and shifts in the Earth’s crust. The coil building, which is where the tokamak will be put together, is complete. Prototypes have been built in various countries so that the design can be finalised and large scale mock-ups have also been put together.

“We’ve moved from finalising the requirements to detailed designs, and from prototyping to actual manufacturing,” Onstott said. At the moment this project is in the transition from design to construction. With so many cultural, social and technical challenges, it’s going to prove to be an interesting project to watch over the coming years.

Photo of seismic isolation pit (c) ITER.org

Posted on: November 03, 2012 08:57 AM | Permalink | Comments (0)

Portfolio management: important for project managers too
Categories: benefits, portfolio management

This month on ProjectManagement.com we’re talking about portfolio management. Portfolios are ways to organise the business of change so that companies can achieve their strategic objectives. You are probably most familiar with portfolios made up of projects and programmes. The OGC, the group behind the PRINCE2 standard, defines portfolio management like this:

“Portfolio management is a coordinated collection of strategic processes and decisions that together enable the most effective balance of organisational change and business as usual.”

But portfolios can do more than just manage change as a result of projects. Portfolios can also be used to make investment decisions, and managing work by portfolio is one way to get a view of financial data.

Pat Durbin and Terry Doerscher, in their book, Taming Change with Portfolio Management, write this:

“No matter how you characterise your portfolio objectives, almost all portfolios include some form of financial data as one or more of the parameters used for analysis. Aligning financial information to the demand-related information structures offers you a way to improve the quality and visibility of information about money, the most ubiquitous portfolio characteristic.”

They go on to say:

“As a basic accounting practice, every organisation has a mechanism to allocate and track money based on how it is distributed to the organisation. While this organisational view of financial expenditures shows you how money is spent, it does not show you why.”

For most project managers, what happens at portfolio level is a bit of a mystery. We get on a do our jobs, delivering the stuff that is required for the project, and let other people work out how it all joins together into an organisational and business strategy. As a result, portfolios can seem a bit remote from what we do day-to-day.

However, you have to realise that whatever you do as a project manager automatically feeds in to the bigger picture. If you don’t know what that bigger picture is, you can’t be sure that you are achieving it in any way. That doesn’t mean that you have to have an intimate understanding of what is going on ‘way up there’ but I do think you should have some understanding of how what you do contributes to the organisational strategy.

This does work both ways. After all, as Durbin and Doerscher say, there is no way that portfolio managers can tell why money is being spent just by looking at a corporate balance sheet. The story behind the expenditure is your story. It’s project business cases and project budgets that explain why money is being spent. They can’t get to the bottom of where the money is going without your input. It is the project manager and the project team members who play a critical role in making all this happen. It’s your tracking that shows how the budget is being spent, if it is realistic and whether or not the project will meet its goals. It’s your evaluation and recommendations that may lead to a project being sped up so the company gets the benefits earlier, or slowed down if something else takes priority for the resources, or stopped completely. Numbers are just numbers – without the narrative, there is no way of telling whether the project, programme or portfolio is performing as you would expect.

Of course, those in charge of corporate financial portfolios may not agree with how the money is being spent. If that’s the case, there are routes to redeploy those funds and resources using the standard corporate governance channels like project steering groups and boards. It could result in your project getting shut down, and if that does happen you should ask why. It could simply be that the company has a higher priority project elsewhere and your project has drawn the short straw. Don’t take it personally.

Management by portfolio is becoming more and more common. As businesses shift towards managing knowledge work, portfolios become the sensible way to get things done. Project managers have a huge part to play in making sure that portfolio managers have the information they need to make the right decisions. Just make sure that when you tell your story it’s a good one!

Posted on: October 28, 2012 07:53 AM | Permalink | Comments (0)

3 ways expenses can pace costs
Categories: accounting, budget, financial management

ExpensesProject expenses aren’t always spread evenly throughout the life of a project. Understanding how costs are split is one way to make sure that your project budget is appropriately phased. For example, if you will incur more costs at the beginning, then you’ll need to factor that in to the budget. If you will pay out lots of money at the end, you need to factor that in as well, to make sure that you have some money left!

Here are 3 ways that costs can be linked to project activities.

Start of activity

Some projects incur the majority of their costs at the beginning. Examples would be:

  • Buying hardware like servers so that the rest of the project can use them for development effort.
  • Software licences that are required up front before you can start using the product.
  • Buying equipment or heavy machinery that enables you to produce the output of a project, for example if you are making widgets.
  • Buying a building for the project team to work in or a building for the project, such as a shop or work facility.

In this case, you’ll want to make sure that your project budget is available to you as soon as you start the project, and isn’t phased by quarter or reliant on some cash flow issue being resolved. You’ll need to spend a large chunk of your budget from day 1, so talk to your project sponsor or your project accountant and make sure that the provisions are available for you.

End of activity

Some projects incur costs at the end of the project. This could be, for example:

  • Paying a contractor in one lump sum for the work they have done, on completion of that work.
  • Paying for equipment retrospectively, if you have managed to negotiate a period of lease or free use until project completion.

In this situation, you’ll need to make sure that your project funds are still available to you at the end of the project. Finance teams often review budgets and if it looks as if you aren’t spending much of your project budget, they might ask for some of it back! It’s good to be able to justify why you need to hang on to the cash, so that you guarantee it is still available to you when you come to need it at the end.

Uniformly spread across activity

The third way that project costs can be linked to activities is through being spread evenly across the lifecycle of the project. Some examples of this are:

  • Paying contractors monthly.
  • Paying third parties monthly or regular service fees, such as for the provision of online project management software.
  • Subscriptions.
  • Property or machinery leases that require a regular payment, such as monthly or quarterly, in advance or in arrears.

This is probably the easiest type of split to manage. Regular payments for regular activities means that your budget will be consumed in an even way across the lifecycle of the project. You can quickly see if you are half way through the project then you should be about half way through your budget too.

Of course, one project could use all of these, as different activities could have different spreads of costs. You’ll have to take that into account when you plan how your budget is phased. If that is the case for you, you’ll also have to consider phasing per task/activity/item as well as what the overall profile looks like. That way you can build up a picture of how much money you’ll need when.

Which is the model that your project uses, or do you phase your project budget in a different way?

Posted on: October 21, 2012 07:39 AM | Permalink | Comments (0)
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