Use This Five Step Approach to Manage Project Finances
Some projects have a large budget and require rigorous management and tracking. Other projects don't have a budget component at all. When you do have project finances to manage, think about these simple steps.
“Here's the TenStep guest blog post "Use This Five Step Approach to Manage Project Finances":
1. Estimate expenses
The first step towards managing your project finances is to estimate the costs. This isn't as easy as it sounds. You need to forecast the total amount of people, equipment, materials and other expenses needed to deliver the project. You then need to estimate the costs of these resources and when in the project plan, these expenses will take place.
2. Set the budget
Estimating the costs is not the same as setting your budget. The budget shows how the money is allocated according to your company's financial rules. The budget shows the expense accounts, allocates capital versus expense dollars, shows when funds are allocated to your project, etc. Ultimately you need to manage project costs according to the budget.
3. Determine if you can get contingency funding
Project estimates are rarely 100% accurate. A contingency represents the estimating uncertainly. Even if you think your estimate is 90% accurate, this means you have a 10% uncertainty. A contingency budget represents this estimating contingency. For example, if you estimated your project to be 100,000 with a 90% confidence, you could also ask for a 10,000 contingency budget to represent the uncertainty. This 10,000 is not used for risks or scope change requests. It can be tapped if it turns out you underestimated work on your project. Not all organizations allow contingency budgets. If you do not have this budget flexibility you can add the uncertainly factor back into your baseline estimate.
4. Track weekly
The next step after setting your budget is to start tracking your spending on the project. You need to track every expense. This could be a manual process but is usually handled by your accounting system. Ask your team to complete expense forms and submit them to you for approval when they spend money on behalf of the project. You need to pre-approved any large expenses before they are incurred so you can more easily control expenditures on the project.
You also need to track your people costs. The total cost of the hours taken by those people can be tracked on the Project Dashboard, so you can see whether your people cost is under or over budget.
Make sure you always have enough funds available to cover your spending over the months ahead. Cash flow management is about managing the cash needed to deliver your project. Make sure your Sponsor has approved the next 1-2 months of work ahead of time, and that the funds needed to manage the project have been made available. Then track the spending of that funding every week.
5. Manage expectations
When you start spending more than your budget, you have four options available to help you stay within budget.
- Reduce costs. This means spending less to get the same job done.
- Reduce scope. See if your Sponsor will agree to a reduced scope, so that you have less to produce for them.
- Use your contingency if you have one
- Re-forecast your expenses and present a new budget to your Sponsor for approval. This is the last choice and means you have to give up on hitting the prior budget baseline.
Managing costs on a project can be difficult. It is made more difficult if the project manager does not keep up on tracking and managing the budget. Use these four simple steps to stay in control.