I put this infographic together to show the various different levels of project financial management maturity, as outlined by the P3O guidance from AXELOS. My view is that most companies should be looking to aim for Level 4. Level 5, with the implications that you are using Monte Carlo simulations and other types of advanced estimating tools, is probably overkill for most smaller projects or businesses without the exposure to risk that this helps mitigate. What are your thoughts? Is Level 5 where we should all be heading?
If you’d like to read more about the different levels, you can in this article.
I wrote last month about the differences between project accounting and financial accounting. One of the big challenges of juggling the two is the issue of securing ongoing funding for your project over multiple financial years.
You know the situation: your project has a three-year lifespan but you’re only granted funding for Year 1. So you start the work, hoping that next year there will be funding available for you to continue.
Ideally, you should get capital funding put aside for all years prior to starting work, but in reality it’s not practical to tie up company funds like this when they could more profitably be used in other ways. So you might find yourself revisiting the project funding process every 12 months to secure the funding you need.
There are some advantages to doing this, especially as your financial needs may change throughout the project and you might not require all the funding you thought (or you might need to apply for more).
Here are some tips on how to secure continued funding for your project.
Know the Dates
If you know you are going to have to apply for funding for your project for next year, make sure you are clear on the budget process timeline. Talk to people who know what’s required.
One thing I have found over the years is that the planning cycle dates can change. One year it seems like we start in October, other years we’re scrabbling to do it all in December. So if you hear the message that the timeline isn’t firm yet, be aware that at some point it will be firm and you can still start planning right now.
Revise Your Estimates
You’ll get asked whether these are the latest estimates for your project. Make sure that they are! You should revisit your schedule estimates with your team so that you can use accurate dates and effort information to plan the costs.
Make sure you’ve been through any external costs as well, so that you know what, if any, capital expenditure is required above the funding for your team.
Create a Budget for the Next Year
You’ve revised your estimates – but you probably did that for the whole project, right? That’s not a problem, in fact, it’s good practice. But you only need to ask for the money that you’ll be spending in the next financial year.
Split out your budget forecast for the coming financial year. I believe you should submit the big picture as well so that everyone knows the total costs being requested over time (because this is as good a point as any to revisit the benefits in the business case) but make it obvious what part of the funding you require in the next 12 months.
Review the Benefits
The powers that be will pour over your request for extra money carefully. Remember, they’ll have lots of people asking for funding for new projects and operational expenditure. They are trying to juggle the needs of the whole company. So you need to make sure that your proposition is still compelling. They might just be looking for a reason to kill off a few expensive projects.
Revisit the business case. Talk to your sponsor. Garner some support from influential people around the right time – that kind of thing!
Make sure that if asked they can justify why the project should continue.
You should submit your rationale for continued funding along with the request for budget, but keep it short. The decision makers are going to be looking at hundreds of these. If they have a particular template they want you to use, then use it, otherwise a cut down version of a business case would do.
The next step is to apply for the funding when the time comes and then sit back and wait for the decision. While that’s happening you can plan ahead.
Make sure that you know when you are likely to hear the outcome of the decision. For now, assume that it is going to be a yes. With that in mind, you can plan how to mobilise the next stage of the project to ensure work can continue without a pause in proceedings.
It’s also worth having a Plan B for what happens if you don’t get funding in time for when you need it to continue. Sometimes it takes longer – I’ve known of businesses where funding for projects wasn’t released until three months into the financial year. That’s a lot of project teams not able to do very much while they wait for permission to spend the money to continue.
Think about what impact that would havve on your project. Could you carry on for a bit without spending any money, if you still had internal resource to work on your project? Would the worrk have to stop? Would you lose key resources from suppliers orr contractors if you couldn’t pay for them? All of this would have an impact on your ability to be able to complete the project successfully, so make sure that the decision makers know what the impact of a late approval would be.
Hopefully, all of this is built into your PMO processes and the ongoing needs of your finance team. Hopefully, there is good communication between your finance team and the rest of the business. Hopefully, the timetable is clear and you all know what’s expected of you. Hopefully this whole thing is a tick box exercise.
Unfortunately, the ‘tick box exercise’ scenario is rarely the case in my experience and you will have to plan, forecast and justify the continued existence of your project. This is not a bad thing. It’s robust business, financial and project governance. Go with it. Build time to do this into your plans and think ahead.
Because yes, they are different. Let’s dive in!
1. The Dates are Different
Project accounting has start and end dates. Your project budget starts when the project starts. The accounting work ends when your project moves through closure and ties up all the contracts and you’re done.
Financial accounting is different. It is based on periods in a financial year. Your financial year will be different in different businesses. Mine starts in May, because that’s when my company was created. For ease, some businesses align their financial years to the tax year (that’s April to April in the UK) or the calendar year (January to December). Whatever works best for you and your team of accountants is OK.
Unfortunately this means that project accounting timetables and financial accounting timetables – what the rest of the business is doing beyond your project – rarely, if ever, align.
2. Reporting Is Based on Different Elements
Reporting in project accounting is based on deliverables. This won’t be news to you. In your project reports you’ll be tracking spend against a certain milestone or a product that you had to buy.
You could also track in a cost breakdown structure against the various deliverables or products that you are creating. Your costs are tied back to the things you are doing, the work you are producing and the output you are creating. It’s very easy to see that buying software licences is linked to the delivery of a new piece of software for the business.
In financial accounting reports, they don’t relate to deliverables. Financial accounting looks at other aspects of running a business, like profit and loss, something that projects don’t much have to worry about.
There’s another difference in the reporting and that’s depreciation. If you are installing assets over a long period of time, as I did on a 18-month software rollout project, your financial accountants will be depreciating the assets behind the scenes. You probably never have to know that this is happening, but it is, based on your company’s defined policy.
On a project, the costs are calculated when invoices are received. If you should be depreciating those assets to spread the cost, it’s done by financial accountants afterwards. I have never met anyone or come across any policy that says this is an expected part of project accounting, so you shouldn’t have to deal with it in your project reports.
3. The Cost Hierarchies are Different
Project accounting hierarchies are based on tasks and projects. Your project costs relate to costs generated by deliverables and project activities.
Rolled up, you can see the costs per project.
Rolled up even further, your programme office can see costs for the programme.
Rolled up even further, your portfolio office can see costs for the business projects overall. They can see which departments have the most project-related spend and cut the project cost data in any way they like.
Financial accounting hierarchies are based on departments and cost centres. You might need to know the cost centres for your work so that you can bill your project costs to the right place. I have worked on a big project with its own cost centre.
But generally the approach financial accounting takes to drilling down or rolling up is different to how you would look at project-related spend.
4. Comparative Analysis Is Different
Comparing project costs across projects is hard. How is it possible to compare the relative costs of a multi-million pound project with huge benefits to the relatively small costs of upgrading a server for one of your offices? And what would the value in that comparison even be?
It’s possible to compare costs against projects in a meaningful way only if the projects are similar. There needs to be a consistent structure for coding the costs on the project, for example, standard cost codes for expense items.
And it’s important to look at why you would want to do that. It can be interesting to do a comparison across projects if you think you’ll be able to find out more about the financial exposure for the business. It might help you understand what is going on across the business at portfolio level if you are able to split and compare costs like this. And it’s helpful for comparing benefits, where it makes sense for projects to compare their benefits.
Comparative analysis in financial accounting is comparatively easy (see what I did there?). You look back at costs for the previous period or the same period in the previous year. Then spot the differences. Simple, and a lot more meaningful.
5. Level of Understanding is Different
Stakeholders don’t always understand project accounting. Your project sponsor probably has some idea of the fact that you shouldn’t be spending it all in one go, but they probably don’t understand the way that you have to process invoices or the quirks of assigning money to capital. Or perhaps they do. You are bound, however, to come across some project stakeholders who don’t get how to spend money on a project in a way that fits with the rules. These ar the people who want changes done but don’t want to pay for them!
On the other hand, most leaders understand financial accounting principles. These are the things taught on MBAs and on the Finance for Non-Financial Managers courses.
In this video I share 5 contract terms that you should know. Remember, this isn't legal advice (and it's good to get some of that prior to any contract) but understanding common procurement terminology will help you manage your supplier relationships more effectively.
EVM Round Up
Categories: earned value
Over the years I’ve written quite a lot about Earned Value management on this blog so I thought it was time to make an easy ‘go to’ guide that brings all of those ideas and resources together.
Here’s my round up of reads about EV: bookmark this for when you’ve got a spare hour or two to browse through! There’s something for everyone, regardless of what stage you are at in your EV journey.
Getting Started and Gaining Support
Not even sure what any of this is all about? I don’t blame you. Earned value is the area of project management I found the most confusing. There are plenty of special acronyms and formulae. If you aren’t mathematically minded it can seem like total overwhelm, but once you understand that it’s about the delivery of work in a cost effective way, it’s a lot easier to understand. This video will help.
Watch: What is EVM [Video]
If you are just getting started with earned value, this article will help you gain buy in for the idea and get senior management support for the transition you are about to make.
If you already use earned value on your projects but your project sponsor is new to it, this article will help you to help them. There are some key things that they should be looking for in your EV reports and the tips here will help them know what they should be seeking out.
Once you’ve dug into EV a little you’re going to want to understand the concepts in a bit more detail. This article has four key terms that you will hear over and over again in your EV discussions.
Launching EVM in Your Workplace
One of the biggest struggles with EV is actually turning the idea into reality. Getting everyone to plan and track their work “the EV way” is pretty hard. Here’s an article about what it takes to launch, with some tips from Steve Wake, project controls expert extraordinaire.
Wake explains earned value as “a disciplined framework for managing work.” His definition is:
“A project control procedure based on a structured approach to planning, cost collection and performance management. It facilitates the integration of project scope, time and cost objectives and the establishment of a baseline plan for performance measurement.”
Read: Launching EVM
A Real Example
It’s all well and good reading about it in theory, but is anyone actually using EV to do their projects? Yes, they are.
Here’s an example of a fantastic project that used Earned Value to keep the project on track: the London Olympics.
Hopefully that selection will keep you in bedtime reading for a while! Is there anything else on earned value you’d like me to write for you? Let me have your ideas please…