I know that putting out fires is your daily bread.
But there’s no need for you to get all stressed out and keep dealing with that when you can plan calmly and enter the situation fully prepared for the threats ahead.
One of the most problematic areas of managing a business relates to its financials.
Project financial management can be a real headache for you and your main managers if you don’t have a tool that equips you with all the insights for making sound business decisions - like whether to take on a project or who should get allocated to it.
Don’t worry; there is a way out.
Keep on reading this article learn how to ace project financial management with some battle-tested best practices.
Why is project financial management important?
Managing and planning your finances ahead offers several advantages to a business like yours.
You could argue that it’s all about balancing the money in and out.
Good finance management protects you from issues like being forced to take a loan in order to maintain your cash flow and pay your people when your client is late with their payments.
This is how you grow securely and sustainably. The smaller the diversity of your project portfolio, the bigger the risk that one delay may impact your entire company.
That’s why you need to have a bird’s eye view of what’s happening in your business. That way, you can step in whenever necessary.
Smart project financial management doesn’t only help you to avoid these problems but makes you look like a reliable employer. When planning, you also take good care of your people.
Now, managing your finances manually with the help of a few spreadsheets is risky. You’re super busy every day. You probably don’t have time to keep checking when large contracts are ending so that you can renew them or start looking for new clients.
By equipping yourself with the right tools, you make sure that your business has positive cash flow and is prepared for events like delayed payment from a client.
It also gives you a chance to assess how a project will contribute to your long-term financial success. IT services companies like yours should look at projects as ventures. You need to understand your cash cycle and how the project fits into it.
By using an automated tool that monitors all the phases of the cash cycle for you and sends you notifications whenever it finds a mismatch, you can solve the problem before it snowballs into a major issue.
What is project financial management all about?
Project financial management is based on planning, capturing, tracking, and managing costs and revenue in individual projects and within your entire project portfolio.
Your primary goal here is achieving a balance between project costs and the projected revenue. This approach also takes into account the potential financial impact on other projects in the portfolio and the overall influence on the business results.
In proper project financial management and planning, you get meaningful financial information that you can use to manage your budget easily.
What does good project financial management look like?
Here are a few signs that your company is doing really well when it comes to managing its finances:
- All the projects have an established profitability rate over both the short and long term plans.
- Estimating a project budget accurately is easy for you.
- All the product financial information is transparent and relevant to managers.
- You can easily check the product budget and check the actual spend rate.
- Project cost tracking is not a problem.
- You smoothly forecast your costs and revenue based on project performance to date.
- How can project management software help in finance management?
Calculating and forecasting project profitability
You’re an IT services company that delivers services to other businesses. They invest in your skills, talents, and experience to create value.
But a project is an investment for you as well. After all, you invest your resources to create the solution. The product needs to bring an ROI for you as well.
This is where project profitability comes in. High-quality project management software can help you quickly calculate whether the project is profitable or not based on the client rates, your resources, and other overhead costs.
Moreover, you can forecast its profitability over the long term. This is especially useful if your company is growing fast. For example, you’re planning to open a new office three months from now. In three months, your organizational overhead costs are going to change. A good solution can accommodate this extra cost easily into the estimations.
Equipped with this data, you can be sure to make a sound financial decision. When choosing between two projects, you’ll pick one that brings you greater profitability and aligns with your business needs better.
1. Budget management
One of the most important dimensions of financial decision-making in an IT company is developing, approving, and tracking budgets for your projects.
This means that you need to learn how to correctly estimate your costs, starting from employee overhead costs to organizational overhead costs.
And it’s not just for the short-term. You should also estimate for the long-term, especially if your project lasts more than six months. A lot of things might change by then in your business.
Relying on spreadsheets for this is just plain inefficient. You’ll end up dealing with a lot of data quality problems. A project management solution brings all the key data in one place to help you run simulations and accurately estimate your project profitability.
Tracking budgets is another important aspect of financials. A project financial management solution can also automatically track the project budget and show you its burn rate. That way, you can quickly understand whether the project is going exactly as you planned, and you should step in and change something.
2. Project cost estimation and cash flow analysis
A quality financial management solution can integrate your projects’ work breakdown structure with resources and costs, creating a comprehensive project financial analysis.
When all of these dimensions are connected, understanding the budget and the impact of employee hourly rates on your project profitability is a piece of cake. Cost estimation is no longer a time-consuming task.
Many such tools allow managers to visualize the cash flow (inflow and outflow). This gives them another opportunity to revise budgets and build a strong foundation for control.
3. Project cost tracking
Planning and forecasting are both important in financial management. But what about execution?
That’s why it’s essential that you also have a tool that helps you to track the financial performance of your project at various levels - task, work package, milestone, project, and the entire product portfolio.
Many project management solutions offer built-in project financials combined with a time tracking feature. Primetric is one of them.
By bringing these two features together, you can easily track how the project costs correspond to the amount of work delivered in real-time. You might discover that you have only done 30% of the required work but already burned 70% of your budget.
Without knowing that, you may have let this project go on and discovered that it’s way over budget when you’re no longer able to change anything. Instead, here you can track the work team members put into the project and manage its financial efficiency.
By integrating projects' progress with the actual cost, you gain a winning combination of insights that build a solid ground for decision-making.
Managing project financials doesn't have to be hard.
Schedule a demo with me to see how Primetric can help you forecast, track, and manage financials at every level - from the level of individual projects to your entire project portfolio and business.