050 – Project Financials 101: A quick and dirty overview of how money affects projects
Ever have a project that costs money? Well, this podcast is for you! In this episode, Kate and Kim give you the quick and dirty rundown of basic project financials – not just within your project, but how money gets to your project, and how your finance team may view those financials.
In a study Kim’s company did at PMO symposium, they found that tracking project financials correlated with success by every measure of project success – scope, schedule budget (obviously), resource management, customer satisfaction and ability to get the project done. So, financials are important! Check out Kim’s webinar recording here: https://kolmegroup.com/surveyresults/
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Why do companies that track financials do so much better than those who don’t? [5:02]
If you are tracking project financials, you are much better off, overall. Here, we’ll share a project financials primer, as well as some candid commentary and tips.
Often, this boils down to decision making. if you’re thinking of making huge changes in scope, there is no context for the financial impact, and therefore, an informed decision cannot be made.
In organizations where financial tracking is not a priority, should PMs take initiative and track it? [7:34]
This can be a journey, and you should consider both the importance of tracking financials, while also considering the extra work and difficulty in doing so. This will be an investment of time and work, but can be huge for your team and the business overall.
What are project financials? [9:10]
By the PMI definition, the project financials is simply how much money you have for your project. But it’s more than that- it’s also when you spend it. It can also depend on whether your project is internal or external, and when the money will be delivered to you.
Most companies go through an annual planning cycle where future projects are talked about. However, these projects need to be prioritized based on their value, in order to fit with company budget. Some companies are transparent about careful about the projects they fund, but some don’t- that’s why you need to be very careful about your project budget and scope from the beginning.
The factors that go into budgeting [14:44]
The factors that go into funding and budgeting aren’t designed in your interest- and that’s something you have to consider. Try to focus on what is available, and try to manage around that. This doesn’t mean you shouldn’t fight for or justify your funding, but this motivation is important to understand when managing your funding.
Budgeting for ad hoc and timeline [16:16]
This varies by organization, but there is usually funding allocated for unexpected requirements in projects. Unless there are financial or legal penalties with deadlines, budgets can change at any point in time.
A project manager worries about budget, a program manager worries about funding. If you are looking at big picture, you need to not just focus on “am I getting funding?”, but “where is my funding going on the project that I do have?” You are being trusted to manage your funding, so you need to focus not just on obtaining more, but on managing that which you have.
Building your project budget [19:04]
Funding is how much money you have to spend, but budget is how much you think it will actually cost based on your plan. Your plan should account for timeline, work packages, and schedule.
In creating a budget, you need to create an estimate of costs, beginning with the largest cost of all: people costs. Simply, it’s the number of hours your team works multiplied by their hourly cost. If you are an external PM, it’s from there you can manage the profitability of projects. For internal PMs, the hourly cost of people could be unavailable, and you should therefore concentrate more on the number of hours accrued, so that the company can therefore give you an estimate of cost. If you want, resource costs alone, you’ll need to talk to HR and/or Finance, as figures are often averaged or include overhead costs for items by the company. It’s also important to note how your company talks about budget, because it varies drastically between organizations.
CapEx vs. OpEx [24:50]
CapEx is “Capital Expenditure”, and it’s an investment or an improvement in something your company owns. For example, buying a delivery vehicle or buying a new building. CapX are “things” that increase the value of your organization. From a tax perspective, these can be very useful.
OpEx is “Operational Expenditure”, and it’s what you spend to “keep the lights on” or run the business. If you owned a rental unit, it would be paying a plumber to maintain the sinks and toilets.
It’s also useful to note that companies vary a lot on how they view these and define them, and it never hurts to ask how they define it.
Budget Contingency [32:30]
Budget contingency is having a buffer, and it’s not bad or dishonest. In fact, it’s irresponsible not to build in a contingency because things will inevitably go away from plan.
A contingency reserve is a bit of extra money you add to your budget to cover issues. You can base it on your work structure and costs and add on to this, or you can look at it from a risk perspective- if the worst thing that could happen does happen, how much do you need to cover that?
Your contingency is absolutely part of your budget, as much as any other part. It is as valid of an estimation as any other item on the budget, and should be built into the package of the project as a whole.
If your company thinks contingency is a waste or is pressuring you to reduce it in your budget, you might add that the cost is built into the project itself, and discuss, if it’s a matter of not having enough money, keeping in touch with them about changing the scope of the project to meet that.
Management Reserve [37:55]
A good management team will put aside some extra money for the case that the project requires more money than initially thought. This is management reserve, and in some cases, a company might require a project to change the scope if they cannot allocate an adequate management reserve.
Your Organization [40:20]
Every organization has different ways they define and justify expenditures. Terms like “earned value” aren’t often used or seen outside of PMBOK, but might still be seen. The same is true for terms like “payback period”, or how much time it takes for an investment to become valuable, or “net present value.”
Benefits Realization [47:13]
It’s what all the cool, hip PMO kids are talking about- Benefits Realization. Let’s say we spent our money on a nice new electric ice cream truck that reduces transport time and increases revenue- our delivery of this truck doesn’t necessarily meet the company’s goal: to sell more ice cream. Benefits Realization is the actual increase in ice cream sold to see if this new electric truck was worth it or not. You should track these benefit realizations to find the benefits of each project.
You might be in trouble if… [55:00]
- You don’t track financials
- You don’t know how much funding your project has
- You don’t know the “when” of your budget
- You don’t do a bottom up analysis of your budget
- You don’t have any contingency reserve
- Your organization doesn’t track benefits realization