The Money Files

The Journal of Consumer Affairs has just published a study that says 27% of people aged 23 to 28 can answer basic financial questions.

The research was headed by Dr. Annamaria Lusardi, the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College and a Research Associate at the National Bureau of Economic Research.  It gives some reasons why so few young people are financially literate including the fact that financial literacy is largely influenced by parental education levels and financial habits.

Young people who are financially literate are more likely to:

• have college educated parents (in particular, college educated mothers)
• have parents who were investors in stocks and retirement savings while they were aged 12 to 17
• have had high school teachers interested in students
• have peers who planned to go to college.

According to the study in the Summer 2010 issue, a college-educated young male whose parents had stocks and retirement savings when the respondent was a teenager was about 45% percent more likely to know about risk diversification than a female with less than a high school education, whose parents were not wealthy.  Young women, African-Americans, Hispanics, and those with low educational attainment scored lower than other groups.  The results of this research support the US Treasury-backed findings of the Financial Capability Survey which were released at the end of last year.

When you are recruiting project managers, you can’t ask questions about a candidate’s parents and their personal financial situation.  However, you could get candidates to do a simple numeracy test, or set them a project finance case study to work on, as part of the recruitment process.

Lusardi, who is the author of Overcoming the Saving Slump analysed financial literacy questions based on knowledge of simple concepts, such as the capacity to do a two-percent calculation, and the workings of inflation and risk diversification.  While one of the aims of the study appears to be to highlight the fact that schools don’t teach literacy, it flags up that young adults entering the workforce may not be as clued up with numbers as you might think.

“If we do not address financial illiteracy among young people through high school literacy classes, we will fail to equip young people with the tools they need to make financial decisions, and we may pay the cost down the road,” Lusardi says.  That could be on your project, if it’s managed by someone who doesn’t have the basic numeracy to ask the right questions.  “Not everybody has an opportunity to learn from their parents or their friends. Young people at the start of their career, or who are in the process of buying their first home need to be financially knowledgeable before they engage in financial contracts.”

Of course, not everyone who will pitch up for a job is financially illiterate, and not all of your young project management employees will need extra help with juggling the finances on a project.  But it doesn’t hurt to ask – as experienced project managers, coaches and mentors we should be looking out for people who might need a helping hand with project financials, and providing it.  Not only could you end up with someone who is skilled at managing maths at work, you could also be equipping someone get to better handle their personal finances.

Find the article online: "Financial Literacy Among the Young.” Annamaria Lusardi, et. al. Journal of Consumer Affairs; Published Online: June 1, 2010 (DOI: 10.1111/j.1745-6606.2010.01173.x).

“Digite does not have extensive financial capabilities,” says Abhinav Praneet, Senior Solution Specialist at Digité Inc.  “You have the basic functionalities for basic project management functions.”

Fair enough.  Digite is a collaboration tool in the Application Lifecycle Management arena, not a financial management tool, but from what I have seen there is more than enough financial functionality to suit the average project manager.  

The product does have enough financial functionality to manage a project successfully, but it does take a bit of effort to set up.  You need to set up account heads such as the ones shown in the screenshot below i.e. the central points for aggregating figures under the head of income or expense when you start defining your budgets.  These could be ‘fixed asset cost’ or ‘budget consumable cost’.  

You can also create financial templates. “You can set up these to define a skeleton of how you would capture your budgets, and estimates,” says Praneet.  Then each time you start a new project you can just call up a template and use that as the basis for entering financial data.  You can create an estimate and then make it your project budget with pretty much just a click.  If you don’t bother to estimate beforehand you can create a budget from scratch.  Digite also allows you to reforecast and have different version of the budget, just in case it changes in the future. You just inactivate the budget, change it and reactivate it – and that version becomes the latest version.

The most important part of the template is the worksheet. “This defines the line items that form the budget items in the project budget,” Praneet explains.  “You can capture all the line items that you are budgeting for on your project.”   One of the lines in the sample data he shows me is ‘books and library materials’ and it reminds me of a conversation with someone on Twitter recently about how we would love to have a budget for buying books at work.

There is a lot of set up required with Digite, but you only have to do it once.  For a tool that prides itself on minimising the amount of data entry users have to do, I think there is a lot of data entry.  But again, you only have to do a lot of it once.  If you are the system administrator, there is a fair amount of effort involved in getting the software configured correctly to make life easier for everyone else.  As with any tool, the data out is only as good as the data put in, so you want to make it as easy as possible for the end user, even if the administrator does have a bit of a job when they first install it.

“Doing it in Digite is better because you can track against actuals,” says Praneet.  “If you do it in Excel you can’t compare.”  Digite allows you to see how you are faring in terms of what you have budgeted for.

The software also allows you to input salaries so that you can track how much your project resource costs.  You can capture transactions and chargebacks, and create invoices for clients based on billable hours and operational expenses for any given period.  

There is a reporting function which will churn out a financial summary, expense report and even some basic earned value analysis graphs (for example, those below) which draw from the integrated timesheet data, all of which are perfectly suitable for the majority of projects.  

Digite might not look the slickest tool on the market, and it seems to involve a fair amount of set up, but once it is operational it looks as if it will meet the needs of most project managers.
 

One of the questions I am sometimes asked is "How can I make my team more efficient?"  Technology isn't the answer to every problem, but it can often help streamline certain tasks or processes, and that can make your team more efficient and therefore more cost-effective to run. 

I'll be presenting to the APM's Women in Project Management SIG on 10 June 2010, and you are invited.

We'll be talking about how project managers can use social media.  I'll be presenting this:

There's a revolution happening in project management: social media tools are finding their way from branding and marketing to the hub of companies and project teams that are making new things happen. The old project management methodologies are being challenged by the fact that those working on projects are using social media tools to communicate and collaborate, and the ways in which we work with colleagues and virtual teams have changed forever. Not everyone agrees with that, though, and convincing management that you want to adopt social media tools for productivity gains can be difficult.

This session will look at the theory and practice of using social media tools to get things done in business. Is it hype or do these tools actually work? And how do you get started with a project-based social media initiative in your own company?

It doesn't matter where you are, this is a virtual event (and it's free) so you can come along if you want to.  Find out more and book for the event here.

Recently I spoke to J. LeRoy Ward, PMP, PgMP, Executive Vice President, Product Strategy & Management, at ESI International about his top tips for project managers handling project finances.  You can read the first part of my interview with him here.  This is the final chunk, and J. LeRoy Ward explains how to start off with handling project finances if you are new to it, and also gives some tips for handling budgets on international projects.

If you are new to handling project finances what are the pitfalls you should be looking out for?

One pitfall is not knowing what your ‘burn rate’ is. The burn rate can be defined as the amount of cash you are spending (or burning through, thus the name) on a daily, weekly, or monthly basis based on personnel and materials. When you know your burn rate, you can look out into the future, calculate the time periods left, multiply that by your burn rate and come within a reasonable estimate of what you are going to be spending.  

The second pitfall is not getting weekly information about expenditures. You need to see this weekly ‘spend’ report if possible. While your organization may not support project budgeting because the project is being supported by the organization’s monthly accounting system, you need to create your own ‘set of books’ to keep track of things.

The third and final point I’ll mention is to the ability to ‘authorize’ spending. Don’t let just anyone have the authority because it is best when you give the final OK to incur costs if it is feasible to do so (especially if they’re external costs such as contractors). My old boss would tell me, “LeRoy, you are the only one to sign the checks. Don’t let anyone else do that. This way, you actually see ’what’s going out the door’.”

That’s really important.  I think there are some project managers who are expected to manage project finances but don’t have the ability to sign checks (or cheques, as we would write over here).  That must make doing the financial reporting really difficult.  Do you have any other advice for project managers starting a project and getting the finances in order?

Meet with your organization’s financial and accounting folks before getting started. Make sure you understand how the organization’s accounting and P&L [profit and loss] statements work and how your project funding and spending get reported in the ‘system.’ Lay down the ground rules at the beginning of the project as to who needs to authorize spending and how financial reporting will be done. Also, if you’re working across funding departments in your organization, like I do, there will be ‘internal’ transfers of funds. A lot of money gets ‘lost’ in these internal transfers so it’s wise to keep a close eye on these.  

Oftentimes, such transfers don’t happen right away but can be posted two or three months after the spending has been done. Remember, you don’t need to be a CPA or Chartered Accountant to be good at the project financials; however, you do need a fundamental understanding of how your organization accounts for project spending so that, when all is said and done and the auditors are seated across the table from you, you will be able to answer all their questions.

That’s great advice if you are just starting out.  What about people who are further on in their careers and who are facing the challenges of handling budgets on international projects?  What are the biggest things to be aware of?

Control is the main concern. As a project manager you need to know who is spending on what part of the project regardless of where in the world that money is being spent. Keep track of things weekly if possible and conduct project financial reviews often. Make sure that you are the one to approve all spending; if that’s not possible, make sure that you approve spending above a certain amount. Also, make sure no other project is using your project account for their activities.  

It is critical that when you receive a report of funds spent from around the world, you are clear about what currency should be used for the reports and how the currency conversion rates, if any, should be determined. I have seen project managers receiving reports citing four different currencies, but because the currency was not stated on the report itself things got confusing. Of course, the greater the difference in currency exchange rates between your project budget currency and another currency, you easily can see the discrepancy, but when the currency exchange rate is close, it’s not so easy to tell. For example, if my project funding is in U.S. dollars but I’m receiving reports in Indian rupees, the difference is great enough that I’ll notice something odd on the report. On the other hand, if my project funding is in Euros and I receive a report in Sterling (Great Britain Pounds) I may not notice it right away because the difference between one pound and one euro is not that great.

Hmm, the difference between sterling and the euro may fluctuate substantially in the months to come, but I see what you mean – the difference is certainly not as big as between denominations of other currencies.  Thanks very much for your time and insights!
 

More on my interviewee:

J. LeRoy Ward, PMP, PgMP, Executive Vice President, Product Strategy & Management, ESI International, brings more than 30 years of expertise in project and program management to the refinement of ESI’s portfolio of learning programs. He works closely with ESI clients worldwide to guide the assessment, implementation and reinforcement of knowledge and skills that allow for the effective measurement and successful adoption of learning program objectives.
 

EVA15, the UK’s annual Earned Value Analysis event, is being held this year 14 and 18 June 2010, at the Armourers Hall, Moorgate, London.

There’s a varied programme over the week, with specialist training workshops scheduled for the Monday, Tuesday and Friday, and the general conference being Wednesday and Thursday.  The conference includes speakers from London’s 2012 Olympics team.

The event will also introduce the new Earned Value Foundation Level Qualification from APMG – Richard Pharro is presenting this on the Wednesday – which aims to help identify those with the basic knowledge required to be able to function in an earned value environment.

APM has an Earned Value specific interest group (who knew?) and one of their number will be talking about how it fits with PRINCE2 and MSP.

If you are at all interested in the role earned value management can play in project financials, this looks like a really interesting week.

View the entire week’s programme and find out how to book here (.pdf) and read more about the event here.