What is financial management?

It is beyond the scope of this course to teach you the complete theoretical principles of financial management.

Project financial management is most relevant to the portfolio and program decision-making level; however, a good grasp of the financial implications of the changes you make at the project level will inevitably reflect positively on your project’s performance.

At a minimum, the project manager should include a set of standard accounting checks in the quality management processes. 

These include rules about the timing and processes for raising invoices, allocating funds, and monitoring performance against tolerance thresholds.

The project manager might also wish to target extra attention to high-risk financial areas (that is, those with a high probability of overspending); for example:

• Areas of complexity
• Areas where tolerance is broad, suggesting that estimates are uncertain
• Areas where there is limited project management expertise or oversight
• Areas of commercial sensitivity and
• Areas where the commercial details have not been fully developed.

Once best financial practice has been established, two very clear improvements are enabled. 

Firstly, an improved quality of reporting from the project level up to the portfolio level ensures that investment decisions are based on high-quality data.

Secondly, risk management is improved to deliver an early warning of potential financial issues, which allows the portfolio to manage, remove, and mitigate potential overspends.

Through this combination of actions and the development and implementation of proactive reporting, increased financial maturity is realised, which improves returns and delivers programs of work on budget.

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Managing cash

Unfortunately, most project methodologies are also silent on cash flow management. 

Given that projects depend on a regular supply of the planned resources – and they do not return revenue until delivery is complete – the timing of their funding is critically important. 

Cash that arrives too late will obviously delay the project; however, cash locked up too far in advance is economically inefficient for the performing organization.

Project finances are, therefore, managed at three levels:

Transactional

Accurate budget preparation ensures that projects have the necessary funds to meet day-to-day task requirements.

Precautionary

This refers to the contingency and management reserve allocations made as part of our risk planning process. 

The key point is that the funding set aside must be accessible (within the given formal approval process) to allow the project to be continuously delivered.

Speculative

As projects work their way through the lifecycle, opportunities arise that may be seized to deliver exponential benefits. 

Projects should have the opportunity to access those funds if they have a business case available to enhance the scope of their original project, especially if they have a proven record of on-plan performance.

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The plan

As already discussed, an early awareness of risks and issues allows us to reallocate resources across programs and portfolios of work more efficiently.

More than just a budget, a robust financial management plan will include:

• A detailed description of the accounting system used (including the project’s chart of accounts)
• The sources and timing of the cash flows that will fund the project
• A critical discussion of the estimation methods used, as well as their acceptable confidence intervals
• Contract requirements, such as the performance bonds or guarantees that are often stipulated in construction projects
• Specific taxation requirements, including any exceptional liabilities and benefits that may be incurred
• Contingency and management reserves withheld (noting that as per the expected monetary value technique, these may be less than the total contingencies allocated in the risk register), and
• Delegated authorities, in other words, who can spend what and when.

As with the human resource plan, it may also be helpful to extract relevant tasks from the WBS and schedule and summarise them in the financial management plan. 

Such tasks might include processing the project’s accounts (debtors, creditors, and payroll), internal and external financial audits, and reviewing estimates and other relevant risks.