The Money Files

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.



 

I like to think that I know a lot about managing money on projects – after all, it’s something I do as part of my day job – but there is always more you can learn.  I spoke to J. LeRoy Ward, PMP, PgMP, Executive Vice President, Product Strategy & Management, at ESI International recently about his top tips for project managers handling project finances.

It turned out to be quite a long interview, but it was so interesting that I didn’t want to edit any of it out.  Here’s the first bit, and I’ll publish the second half here next week.

What's the one top thing project managers should bear in mind when handling project finances?

Regardless of what people claim, money is ultimately the most important element on a project. Even if the schedule is more important from a project objective point of view (in other words, the company is willing to pay more to get the job done earlier), being able to account for all the funds and where they were spent is the thing in which the organization -and its auditors- is most interested.  

So, you need to know how much was actually budgeted to the project, and you need to keep accurate, comprehensive, and detailed records of all actual (i.e., expenses and payments) costs. This may not be as simple as it sounds. Many organizations don’t do project accounting; they have systems for general accounting. You need to sort out how your organization does it first; thereafter, you can make adjustments accordingly. In addition, as a project manager you probably won’t be able to be the project financial controller at the same time you’re managing every aspect of the project, so hire someone capable and trustworthy for that job.  

That’s a good tip.  Project accounting can be a lot of work.

It is no accident that in many organizations the CFO/Controller has his office right next to the CEO’s. Take a page from their playbook. Have your project financial controller always by your side, and always know the financial status of your project. In other words, always know what you have spent and how much you have left and what the unfinished work is going to cost. This way, you’ll know if you need more money well in advance of asking for it.

What advice do you have for budgeting properly so you don’t have to ask for more money later?

Simply put, you need to figure out how you are going to allocate your money across the project’s components. When Emaar Properties developed Burj Khalifa in Dubai (the world’s tallest building) I doubt the project manager and developers just said to everyone, “We have a lot of money, so let’s start working.”

The budget was broken down and allocated to ‘pieces’ of the work. Therefore, each element of that project had a budget, there was someone responsible for each element, and it was their job to monitor and control their piece of the budget. Project financial information was then collected and aggregated so the project manager and developers could see the big picture and then were able to make certain decisions across the board for the good of the project. So, for example, if one element of the project, buying and installing windows was ahead of budget, but the HVAC [heating, ventilating and air conditioning] piece was over budget, the project manager could take some of the money from the windows piece and reallocate it to the HVAC.  

I see.  So splitting up the budget into manageable chunks is the best way to do it?

It is simply impossible, and ill-advisable, to try to manage a budget at the highest level without having the lowest level budgeting and monitoring taking place on components of work. Of course, if the project is small, this can be done, but I would suspect most people reading this don’t work on projects that are that simple; rather, they work on complex undertakings that are comprised of many pieces. To be sure, the best way to approach financial management is to have a thorough and complete work breakdown structure (WBS). By using a WBS, each major deliverable, at the very least, has its own budget to be monitored.

Next week you can find out what J. LeRoy Ward had to say about starting out managing project finances and his tips for handling budgets on international projects.

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.
 

I had the opportunity to speak to Gary W. Patterson recently, the self-styled FiscalDoctor.  He gave me a copy of his eBook, Five Areas Where Risk Can Lurk, which is an extract from Stick Out Your Balance Sheet and Cough: Best Practices for Long-Term Financial Health.  It’s chapter 4, and it looks at how you can assess your company’s financial fitness, which will give you some ideas of places to look for project risk.

Click here to download the eBook in .pdf format. [link removed May 2020 - no longer available]
 

Last week I shared with you some questions and answers from my recent webinar on managing money on projects.  I wasn’t able to answer all the questions after the presentation, and those questions I didn’t get a chance to answer in person I am answering here.

Here’s another batch of Q&A.

Can you give a definition of "Consultancy"?  Is that research/consulting on tasks OR the hiring of outside resources to assist with the project tasks?

I think it’s both.  If you don’t have the skills amongst the permanent staff in your organization, you need to hire those skills in.  The people hired could be doing specialist tasks like research or technical consulting, or they could be an extra pair of hands to help you get the project done, like an extra project manager on a large program.  Either way, these are additional, external resources and that’s what I mean by ‘consultancy’.  Essentially, it is paying for people who are not permanent staff.

Do you ever find that being transparent with $$$ leads the funding away from your project and onto another "priority" thereby interjecting project risk?  Seems like the norm is to cloak the budget until successful completion and then release at completion with the rest of the resources.

I think this is very dependant on the culture of your organization.  Fortunately I have not worked anywhere where I have seen this happen, although I wouldn’t be surprised to learn it did go on in some organizations.  It is all to do with what the company thinks are its strategic priorities and unfortunately your project might not be one of them.  A strong PMO can help here, as well as a mature project management culture where people understand the value of not chopping and changing their minds about projects every five minutes.  Projects cost what they cost, and if the investment is worth it and you haven’t padded out the budget unnecessarily, you shouldn’t have to worry about sharing the figures.

If your project is no longer a strategic priority it seems sensible to me to divert the funds on to something else that will deliver great value for the organization.  If you are worried that your management team doesn’t have the foresight to do this which leads you to hiding your budget until the project is over, they all need to go on Sponsor training!

Do you consider utilities, rent, etc to be a project management cost or deliverable cost?

Utilities, rent and so on are project management costs.  Let’s recap the difference:

Project management costs are the costs of doing the business of project management e.g. paying for your team members, training including the costs of a trainer, room hire, refreshments, delegate transport and accommodation, hosting large meetings off-site and hiring equipment.

Project deliverable costs are expenditure directly related to what the project is going to deliver e.g. software, hardware, purchasing equipment, licensing and things like buying software and funding anything that will change as a result of your work like new stationery or user guides or paying for documents to be translated.  

Might training be considered a deliverable cost associated with quality assurance? What about testing resources?

Yes, I suppose they could be.  The purpose for me of categorizing costs in this way is simply to provide a starting point for preparing a comprehensive budget.  People often think about what they need to buy to deliver the deliverables – a new server, new office equipment, software licences etc – but they forget about the costs required to make it all happen.  These are what I call project management costs and are the overhead of running a project.  In real life it doesn’t matter at all if you categorise training as a deliverable cost or a project management cost – the important thing is that you have considered it and included the cost in your budget.

You can see the whole presentation online here, via a recording of the webinar.  I’ll have some more Q&A for you soon!