Most projects have a budget, so learning how to handle money on projects is a really important skill for project managers.
Project financial management is even more important now, as we work in a climate of increased financial awareness, given the recent economic crisis. Gone are the days – if your organisation ever had them – when companies had money to spend on whatever the company felt like. Now, with increased competitive pressure and a general tightening of the belt all round, as project, programme and portfolio managers we have to be really careful that we are spending money on the right projects, and that we are budgeting carefully when that money is allocated to us.
People often think that managing money on projects is very boring, mathematical and dull, and therefore not something that they want to spend much time working on. I don’t feel that project budgets are dull – in fact, getting the finances right is one of the challenges I enjoy the most with the projects I manage. However, even if you feel that managing your project budget is the worst job in the world, you should still know how to do it properly.
There are three components to project financial management:
- Project budgeting
- Project accounting
Today I’ll be looking at project budgeting, and I’ll cover accounting and charging later in the month.
Does your project have a budget? Even the smallest project will have overheads: your time as the project manager as a minimum. Nearly all projects will have more than that, so part of your role in setting up the project is to define and propose a budget for the work and get that approved.
Creating a budget is like putting together a project schedule. You can work out how much money you will be spending based on what you know needs to be done, just as you work out how much time the project will take based on the same information. Think of the budget as a shopping list of all the things you need to buy to make sure the project gets completed. Just like a trip to the supermarket, you might not end up spending exactly what you expected but at least the list gives you a reasonably accurate starting point.
Companies that carry out a lot of projects will probably have a standard template for submitting a budget, so you will probably find that a form that already exists. If there isn’t one, or if you don’t like the one that is provided, you can create your own. Essentially it’s just a spreadsheet with the various items and their cost listed out, again, like a shopping list. I’d advise that you group similar costs together so you have sub-totals as well as an overall total and include a line of contingency for risk management.
Once you have your budget written down, it needs to be approved before the project can spend anything. This is normally done during the project initiation phase, although even before this point you may have to provide some high level estimates. However, you shouldn’t start your project in earnest without a clear view of exactly how much it will cost. Your sponsor, project board or steering committee is the first point of approval, and you might need another department or the Finance team to approve it as well.
The budgeting process also includes forecasting, which you do at regular, pre-defined times throughout the year to check that what you have budgeted is actually what you still think you will spend and nothing has changed. Projects that have a short duration may not need to reforecast, but if your project will run for more than six months it is worth checking to see at what points you will need to provide a reforecast. Companies do this at various points throughout the year, normally at the end of each quarter, although a major reforecast may only take place half-way through the year and this might be the one they ask you to contribute to.