Project Management

The Money Files

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A blog that looks at all aspects of project and program finances from budgets, estimating and accounting to getting a pay rise and managing contracts. Written by Elizabeth Harrin from GirlsGuideToPM.com.

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5 Common Project Financial Measures

Project financial analysis is what happens before a project is approved, and is a way of making sure that the company is spending its investments wisely by making smart choices about what projects to take forward. Thorough analysis is important to ensure that you don’t end up doing projects that lose money.

According to The Harvard Business Review Project Management Handbook: How to Launch, Lead, and Sponsor Successful Projects by past PMI Chair Antonio Nieto-Rodriguez, there are 5 common financial metrics: opportunity costs, payback period, IRR, NPV and ROI. Let’s take a look at those.

Opportunity Costs

Opportunity costs are a way of looking at what you aren’t going to do because the business’ resources will be tied up on this project. If the other projects are worth more to the business (however that is decided), then this project should be put on hold and instead the other projects should be taken forward.

You’ll need a relatively mature portfolio management approach to do this because you’ll have to identify the other projects that will be put on hold, and have budget/resource assessments for them to calculate what it would cost to do those – and have information about their benefits. If you’re in the kind of business that only does full business cases when the idea is pretty much ready to go, then this could be hard.

Even so, you should be able to include a paragraph in the financial evaluation that talks about the fact other projects will not be going ahead if the company decides to invest in this work.

Payback Period

This measure relates to how long it takes before the project starts to generate a return. On a programme, that could be before the end (and I’d hope it would be) because individual projects should be generating benefits as they complete.

Nieto-Rodriguez talks about the duration of the payback period being set by the organisation. Then if the project earns back the investment before that time is up, it’s a worthwhile investment. If it’s going to take longer than that, it’s time to think again. Typically, shorter payback periods are better, as it means the project starts to earn back more than it cost to do in a shorter time.

Internal Rate of Return (IRR)

I used to find IRR a difficult concept to understand, because rate of return is quite clear, but what’s the ‘internal’ all about? IRR refers to the amount the project ‘earns’ for the business. IRR is expressed as a percentage, and relates to the efficiency of the investment.

Let’s say you put your project budget in the bank and didn’t do the project. Instead, you just claimed the interest that the bank paid on the money. Your investment is safe, and you make some money back. But bank interest rates are pretty rubbish for the most part.

What if you did the project instead? The IRR calculation tells you what the ‘interest’ rate would be – it’s a different way of looking at the way project’s generate return. If the IRR is better than what you’d get in a bank, then the project is worth doing. If the IRR is less than what the bank could offer, you may as well save your time and effort and put the cash in the bank – assuming that financial returns are what you want to get.

Net Present Value (NPV)

NPV is really useful, because it helps you work out project financials as they relate to what money is worth today. A positive NPV is what you are looking for: that translates as the project forecasts being worth an amount that generates future cash at an acceptable rate.

NPV targets, minimum rates and discount rates may be set as industry standards or by your finance team, so check how if there are any specific variables or values you are expected to consider in the calculations (or better still, get a finance person to give you a template where you just plug the project forecasts in and get the NPV out). NPV is expressed as a financial value.

Return on Investment (ROI)

This measure relates to the project’s financial return given the investment made to deliver the project. In the business case or financial documents, it is expressed as a percentage of the total anticipated project cost, often including the Year 1 to 5 opex or running costs too, but the exact calculation will depend on the criteria set by your finance team.

ROI is a way to clarify what the business gets back from its investment. Typically, the higher the ROI, the better, as it means that the company is going to receive more income from the investment and it will pay off in a better way.

Posted on: January 18, 2022 04:00 AM | Permalink | Comments (5)

5 Project Management resolutions with a financial theme

It’s the time of year when project managers (and everyone else) are looking to make resolutions. You know, the kind of promises you make to yourself in the dark days of winter and then have completely forgotten by Easter.

On the off chance that you’ll be making resolutions this year, here are some you could consider. They all have a money-related theme, so if you want to brush up your budgeting or polish your financial management skills in 2013, these could be great resolutions for you to adopt. So here we go: 5 promises for better money management over the next 12 months.

1. I will look at historical data for forecasts

When you are managing projects that are repetitive in nature and that the team has a lot of experience of, it’s very tempting to simply let them estimate the length of tasks and assume that they know what they are doing. Most of the time, they probably will. But it is worth validating their estimates against historical data from timesheets and previous project schedules. Use your online project management software to pull up reports of how long things took the last time you did them.

This could be at the level of an individual task, like completing a particular piece of coding, or a project phase, like testing. Or both. The purpose of checking is to make sure that your estimates really are sound and that the people who are estimating are not making the same mistakes about task duration on every project.

2. I will do my timesheets in a timely fashion

This is a personal resolution for you, although you could extend it to all your project team members. The risk of not doing your timesheets on time is that you forget exactly what it was that you were doing. As a result, you block out 8 hours per day for a task called ‘project management’ which doesn’t give you any breakdown of how you actually spent the time. Worse, you could be booking time to one project when in reality you got pulled off that project to spend half a day on some other project. These things happen in real life, to you and your team members.

By aiming to complete your timesheets at least weekly you’ll not have long enough to forget what you were working on!

Training

3. I will understand Earned Value Analysis (or teach someone else how to do it)

If you don’t understand EVA, make 2013 the year when you get your books out and study how it works. If you do understand EVA, make a resolution to share your knowledge with someone else this year. Even if you don’t use EVA on your projects, it is a very useful skill to have.

4. I will do my expenses on time

Most project managers will incur expenses in the course of their job, such as travel to meetings. Not doing your expenses on time means that you are out of pocket. Many companies only pay expenses once a month in the monthly pay run, so don’t let your expense bill mount up – that’s effectively a loan to your company.

Get your personal paperwork in order by keeping receipts together, noting down your mileage after every trip and understanding the schedule for submitting expenses so that you don’t miss the deadlines.

If your expenses are being cross-charged to your project it is even more important to get your expenses in on time. If you don’t, your project budget will reflect that you have more ‘in the bank’ than you actually do.

5. I will review my budget quarterly

You do this already, don’t you? If not, make 2013 the year when you review your project budget forecasts regularly. If your project runs over two quarters you’ll probably be asked to do this by your finance team anyway, but even if you are not, it is still good practice to get out your spreadsheets and just check that you are still on track to stick within your budget tolerance limits.

Have you chosen any of these as your resolutions for 2013? If not, what are you having as your resolutions instead?

Elizabeth Harrin is Director of The Otobos Group, a project management communications consultancy. Find her on and Facebook.

Posted on: January 17, 2013 03:10 PM | Permalink | Comments (0)

5 levels of financial management maturity

The OGC’s Portfolio, Programme and Project Office (P3O) guidance includes some information about project management maturity. Maturity is measured on a 5 point scale from Level 1 (not very mature) to Level 5 (very mature) against 7 areas – in P3O speak, ‘perspectives’.

One of the perspectives is financial management. Here’s how you should be performing at each of the different levels.

Level 1

There is a “general lack of accountability” for monitoring what project budgets are spent on. Projects have few, if any, financial controls and generally don’t have formal business cases. This means it is hard for the company to properly assess potential projects and decide where the organisation’s funds should be spent.

Level 2

There are a few more business cases around, although there is no standard template. The best business cases will explain the rationale for the project but not necessarily have a lot of financial information in. Still, it is something to go on when deciding what investment decisions to make.

Project managers are applying financial controls haphazardly, depending on their previous experience and skill level. Contingency planning and risk management are done without much consideration of costs. For example, contingency budgets are just made up, instead of being calculated on the basis of likely risk.

Level 3

There are standards for business cases and how to get business cases approved. Business cases have one owner. Project managers manage cost and expenditure – and there are corporate guidelines that show how to get these done. There will be links to the Financial department or other teams who carry out financial controls.

Level 4 (this is where you should be aiming, if you aren’t already here)

There are processes in place to enable the organisation to prioritize investment decisions. In other words, the financial information available prior to a project starting is good enough to work out whether it is a strategically important project, given the available funds and resources. Project budgets are managed well by project managers, and there are tools in place to enable tracking and comparison of financial information.

Level 5

Level 5 maturity is a significant jump up from Level 4 and really focuses on complete management and control at an organisational or portfolio level. Financial controls are integrated with the company’s general financial management plans and approaches. Estimates are accurate and produced using estimation techniques which are regularly reviewed: the information feeds into generating better estimates in the future. Most importantly, the organisation can show that project management and the projects that are delivered offer value for money.

I think most companies are a long way from Level 5, but in many cases they don’t need to operate at that level to be effective and to do a good job. Where do you think your company falls within the financial maturity model? Let us know in the comments.

Posted on: October 19, 2011 03:22 PM | Permalink | Comments (0)

How not to leak company secrets

Categories: corporate finance

Psst!What would your project sponsor think if you leaked sensitive company information or financial data to a third party?

Maybe you think that you'll never have to answer that question because you subscribe to the PMI Code of Ethics and Professional Conduct, or because your personal ethical boundaries mean that you would never give away company secrets under any circumstances.

OK. But what if I told you that employees at Google, Barclays and the Pentagon all leaked sensitive information without knowing about it?

According to a new guide from document collaboration software firm Workshare, metadata in documents can give away company secrets.

What's metadata? It's all that stuff Microsoft puts into your document: comments, the version history, and corrections made through the 'track changes' feature. Metadata is automatically added to Microsoft Office documents whenever a document is created, edited or saved. If you use collaboration features such as opting to record your changes in PowerPoint so that you can send them back to the document's original author, then all that is stored as metadata too.

Document properties often store the name and organisation of the author. If you repurpose a PID, for example, to use for another client, be careful about what detail is stored in the properties that could give away who else you work with.

The Workshare report details several widely publicised, high profile cases in which metadata has landed organisations in hot water. For example:

  • Google let slip financial forecasting information which was hidden in a PowerPoint document which was circulated to the Wall Street community.
  • Barclays accidentally shared contract information in hidden columns in an Excel spreadsheet when it submitted a bid to buy assets from Lehman Brothers.
  • The Pentagon leaked information about the death of a U.S. agent in a PDF document with hidden information.

Even if you aren't dealing with multimillion dollar deals or sensitive financial models you should still be careful about what you could be unwittingly sharing. Circulating financial information about your project could be commercially damaging even if it is a small project. Worse, the company could end up in legal hot water with fines to pay if sensitive data is leaked. No project manager wants to be the one who got the company sued.

So should you stop using track changes? Of course not. Metadata is useful for identifying, indexing and managing documents. Track changes makes editing project documents that have several rounds of revisions possible. Just be careful about what you send outside the organisation.

The report does recommend that you make an effort to strip out comments and revisions before you send documents to people outside the company.

Here are some tips for your documents:

  • Remove the names of reviewers and the comments they have entered into the document or revisions they have made.
  • Check document headers or footers in every section to ensure logos are removed.
  • Remove hidden text.
  • Delete hidden columns and worksheets in Excel; don't just hide them.
  • Delete macros in the document.
  • Turn off 'fast save' in Word as this only stores revisions which allows readers with some text editors to see how the document has evolved including anything that was deleted.

In short, be smart about what you circulate to avoid exposing your company's financial data or other secrets when you share documents.

You can read the whole report here: www.workshare.com/collateral/misc/Dangers_of_Document_Metadata.pdf

Posted on: July 18, 2011 04:42 PM | Permalink | Comments (0)

Stick out your balance sheet and cough

Categories: budget, corporate finance

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]
 

Posted on: May 14, 2010 01:39 PM | Permalink | Comments (0)
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