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 projectfinances to manage, think about these simple steps.
1. Estimate costs
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 resources needed to complete the work. You then need to estimate the costs of these resources and when 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. A contingency budget represents this estimating uncertainty. 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 is to start tracking your spending on the project. You need to track every expense – human resources and physical resources 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-approve any large expenses before they are incurred so you can more easily control expenditures on the project.
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
Report the true status of your spending and your forecasted spending. If you are at risk of going under budget or over budget, be sure to manage expectations so that there are no surprises.
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 five simple steps to stay in control.