Project Financial Management: Strategies for Project Success
If you’re an agency professional, you know how important project financial management is. But are you fully satisfied with your current system?
In this guide, we’ll go through the essential concepts for effective agency financial management, discussing useful resources and data to drive business growth. Keep reading to learn how to optimize your day-to-day agency operations with financial planning.
Key Takeaways
- Project financial management is crucial for the efficient and effective use of financial resources in a project and impacts overall agency performance.
- The project financial manager plays a key role in budgeting, progress tracking and risk management, and delivering financial reports to stakeholders.
- Utilizing specialized software for project financial management, such as all-in-one tools like Productive, enhances efficiency and provides accurate, real-time data.
- Some of the main techniques of project financial management include cost estimation, scope creep management, revenue and expense tracking, and KPI analysis.
What Is Project Financial Management?
Project financial management is the process of handling all financial aspects of a project within an agency. It includes key steps such as estimation, budgeting, risk management, and financial reporting. Another term that’s frequently used is project budgeting or project budget management.
PRODUCTIVE PROVIDES INSIGHTS INTO KEY PROJECT FINANCIALS
The roles that handle financials usually depend on the agency size: a project manager usually manages it with their other responsibilities, such as timeline tracking and capacity planning. In some organizations, you might also encounter the specialized role of the project accountant, which handles tasks dedicated to finance.
The project manager will usually work together with a finance manager to set the budget and monitor expenses. In startups or small agencies with leaner operations, this might fall to a C-level role.
The role of the Finance Manager is more number-based, but there’s a lot of crossover with Operations. That was one of the main reasons we moved to Productive: to have this one source of truth across the business.
Regardless of the specific position carrying out the function of a project finance manager, this process is an essential part of your project’s success. It must be carefully monitored from start to finish to ensure everything is going according to plan. After all, the healthy functioning of a single unit or project within an agency points to the overall operational efficiency and financial health of the organization.
Project Financial Management and the Project Lifecycle
Project financial management is usually undertaken in phases that correlate with the project lifecycle.
1. Initiation phase: Before the project is agreed upon, its financial feasibility needs to be assessed with regard to agency capacity.
2. Planning phase: Financial management starts during project planning. Project expenses and budgets are allocated alongside main milestones and their timeframes.
3. Execution phase: While the project team is working on delivering tasks, the budget needs to be closely monitored for expenses and cost variance.
4. Closure phase: When the project is complete, a financial review should be conducted to gauge the return on investment (ROI) and the overall financial impact of the project.
The Importance of Project Financial Management
Financial management is a core part of effective project management. Doing it right means you’ll likely deliver your project within the timeframe and with high-quality results. Doing it wrong can set your agency’s growth back considerably — in fact, research shows that for every $1 billion spent on projects, nearly $122 million is wasted due to poor project performance, often linked to inadequate financial management (PMI).
So then, what are some specific ways in which project finance management enhances business performance?
The benefits are numerous, but here are some of the main things to consider:
- Informed decision-making: Financial management provides critical insights into your agency’s health. This helps shape sustainable strategies for the future and identify areas for investment and development.
- Optimized capacity planning: Having the full picture of your performance on one project means you can more easily make allocation decisions for other projects. Additionally, by tracking utilization, you can balance workloads to maximize efficiency and productivity.
- Risk management: Even the best-planned projects can fall victim to unexpected changes. Proper management of project finances identifies and resolves potential risks early in the project lifecycle, such as cost overruns or incorrect billing.
Challenges in Project Financial Management
According to the Standish Group Chaos Report, some of the most frequent causes of project challenges are: incomplete requirements (12.3%), changing specifications or scope creep (11.8%), lack of resources (6.4%), unrealistic expectations (5.9%), and unclear objectives (5.3%).
While budget overruns can occur despite all precautions, one of the main steps toward successful risk mitigation is client-agency transparency.
I think that in project management there’s a tendency to focus solely on profitability, but it’s inevitable that projects will go over budget, and that’s ok. However, it’s important to have transparency on where that stands, and Productive gives us that visibility.
Read the full story: Seven2 Saves Hours on Operational Tasks Each Week Using Productive
But in order to maintain open communication, you need to have accurate and timely budget tracking. Doing this manually can be challenging and error-prone, but the right software solutions can help you automate this process and receive reliable data in real time.
Best Tools for Effective Financial Management
Traditionally, agencies have relied on manual methods, such as spreadsheets, to manage their finances.
Nowadays, research shows that most organizations have moved on to more automated solutions: only 5% of agencies report being largely dependent on agencies (Productive & SoDa). And with good cause, as PMI research likewise reports that:
Just having spreadsheets filled with numbers is not enough; for financial information to really add value, it must be must be relevant, timely, and accurate. It must provide a true picture of performance and provide fact-based information needed to make realistic forecasts of future performance.
Source: Powerful project financials
However, this doesn’t mean there isn’t still room for improvement. The same research shows that 52% of agencies depend on disparate tools with some integration, with only 14% of agencies utilizing an integrated platform that enables real-time analysis.
While choosing a specialized tool for finances, such as accounting software, can certainly help you support your finance teams, an all-in-one solution can go a step further. These tools aim to integrate your processes by aligning multiple workflows and teams with comprehensive features for project management.
Related: Revenue Operations Guide: Implementing RevOps in Your Agency
We’ll give you a practical example by exploring the key features of Productive, a popular integrated solution.
Productive – An All-in-One Project Financial Management Tool
Productive is an agency management software designed to support agencies of all shapes and sizes. It provides a range of features for both day-to-day tasks and broader agency initiatives, including task management, resource planning, budgeting and billing, and much more.
GET FULL CONTROL OVER YOUR BUDGETS WITH PRODUCTIVE
Some of Productive’s key project financing features include:
- Billable hours management: Productive offers integrated Time Tracking functionalities that include various ways of creating entries — with an automated timer, through manual entry, or via automatic creation with resource bookings. Managers can easily mark time as billable or non-billable or request changes to entries.
- Budgeting: Build and manage your project budgets in Productive. The Budgeting capability supports budgets of all types, including a simple way to manage your retainers. You can also split up complex budgets into multiple phases to simplify your money management.
- Revenue recognition: With Productive’s Resource Planning, you can access powerful forecasting features. After scheduling your employees, forecast revenue, profit margins, and budget burn up until the project deadline. Any changes you make are automatically applied to your data.
- Billing: Simplify administrative tasks with Productive’s Billing feature. You can create brand-friendly invoices, attach timesheets, and send them directly from the platform. To support cash flows, you can use automated payment reminders.
- Reporting: Productive’s Reporting provides more than 50 agency-focused templates, as well as custom fields for adding parameters outside of the scope of the platform. You can share them with stakeholders by organizing visualizations on a dashboard or scheduling reports via email.
Additional features include Project Management, Docs, Sales, Purchase Orders, and Automations. All of these capabilities combined help project managers handle the full picture of their projects while streamlining collaboration and communication across teams.
Streamline Your Project Financial Management
Unlock your agency’s potential by investing in an all-in-one tool for project, financial, and resource management.
4 Key Steps to Effective Project Budgeting
Financial project management can be complex, even when it comes to the most straightforward projects in boutique agencies. We’ll go through some essential techniques that can help you manage your finances resources with success, including tips for better cost estimation, scope creep management, revenue recognition, KPI tracking and reporting.
1. Cost Estimation
There are two most commonly used kinds of cost estimation, knows as the Rough Order of Magnitude (ROM) estimate and the Definitive Estimate.
- The ROM Estimate has an accuracy arrange between -25% to +75%, meaning that the project might end up costing 25% less or 75% more than the initial ROM estimate. As its name states, this is a rough estimate usually given to executives in order to determine whether to undertake a client engagement or not. It can be more flexible, as it doesn’t have to focus on exhaustive data to guide informed decision-making.
- The Definitive Estimate, which is formulated once the project’s scope and requirements are clearly defined, has a more precise variation range of -5% to +10%. This estimate requires a greater investment of time and effort to prepare, but its accuracy is crucial for strategic budgeting decisions. It forms the basis for allocating resources and managing potential changes effectively, offering a reliable financial framework for the project’s execution.
Historical data is an important factor in being able to manage financial resources across projects with success. From how long employees take to execute similar tasks, to overarching concerns such as project profitability or common expenses, software solutions like Productive can deliver these crucial insights to streamline your financial management process.
Additionally, centralizing your insights on a single platform helps standardize data for more reliable comparisons.
Learn more about optimizing your reporting with Productive:
2. Managing Scope Creep
One of the most common pitfalls of a carefully estimated project is scope creep. Scope creep is experienced by as many as 34% of projects globally (PMI), for reasons that can range from lack of communication with the client, unrealistic expectations set from the project planning phase, and overall a lack of documentation and transparency during the management process.
PRODUCTIVE SUPPORTS YOUR PROGRESS WITH REACTIVE RESOURCE ALLOCATION
Here are some things to consider when dealing with scope creep:
- Make sure to set your project terms in the contract clearly. For example, a common roadblock in website project management is the maintenance phase — does it include additional features, and what does the client even understand by “feature” or “bug”? These minor details can contribute significantly to project success or failure.
- Transparency during the project management process is another essential factor. If you’re able to back up your decisions with data, you’ll find that your clients are more understanding and willing to cooperate. For example, with Productive’s Forecasting chart, you can use your resourcing to see the impact of scope changes on your profit margins, revenue, and budget burn.
- Finally, consider turning scope creep into an opportunity. Going back to the first example with a website project, if there’s a need for it, why not offer maintenance as a retainer service? You can include various other perks such as access to specific developers on your team for any questions, and continuous upkeep for web hygiene.
3. Monitoring Revenue and Cash Flow
Effective project financial management encompasses diligent monitoring of revenue and cash flow, along with meticulous documentation of project expenses.
GET RELIABLE BILLING AND CASH FLOW MANAGEMENT WITH PRODUCTIVE
Here are some examples on how you can manage this with business budgeting tools like Productive:
- Make sure to set your project terms in the contract clearly. For example, a common roadblock in website project management is the maintenance phase — does it include additional features, and what does the client even understand by “feature” or “bug”? These minor details can contribute significantly to project success or failure.
- Transparency during the project management process is another essential factor. If you’re able to back up your decisions with data, you’ll find that your clients are more understanding and willing to cooperate. For example, with Productive’s resource plans, you can create tentative bookings for employees and see the direct impact of scope changes on your profit margins, revenue, and budget burn.
- Finally, consider turning scope creep into an opportunity. Going back to the first example with a website project, if there’s a need for it, why not offer maintenance as a retainer service? You can include various other perks, such as access to specific developers on your team, and continuous upkeep for web hygiene.
4. Tracking Key Performance Metrics
The final part of financial management is understanding essential agency metrics and how to most effectively measure them. This involves closely monitoring and analyzing key performance indicators such as:
- Gross income
- Profit margins
- Billable utilization
- Scheduling accuracy
- Estimated vs actual costs
With Productive, you can get the most out of your agency’s insights by forecasting these key metrics to make informed decisions. This strategic approach can lead to impactful changes, as illustrated by the experience of Ilija Brajković, the CEO of Kontra Agency:
We ended up terminating contracts with two of our oldest clients after only a few months of using Productive. We thought that we were at least at zero with them, or that we had some small earnings, but it turned out that we were losing money because the money they paid us did not cover salaries, fixed overhead per hour, and variable overhead per hour.
Adapting Financial Management Practices Across Industries
Each industry and project type comes with its unique set of financial demands, risks, and compliance requirements. For instance, in construction projects, financial management must account for material costs, labor, equipment, and fluctuating market prices. In contrast, IT projects might prioritize software development costs, licensing fees, and technology upgrades.
Effective financial management in these diverse settings involves not only tailoring budgeting and cost control methods but also adapting to the different timelines, resources, and KPIs inherent to each sector. Hence, a deep understanding of industry-specific dynamics is essential for guiding projects toward financial success and sustainability.
Takeaway: How to Optimize Project Financial Performance
Project financial management is an indispensable element of your agency’s success, closely linked to every phase of a project’s lifecycle. From the initial assessment and estimation to monitoring and adjusting for changes during project execution and thorough financial review upon close, each step is critical.
Finding a software solution that can support your budgeting and overall agency processes is a significant benefit. While there are many different types of suitable tools, consider the advantages of an all-in-one solution for standardizing data and eliminating silos across your agency.
Interested in finding out more? Consider booking a demo with Productive, the all-in-one agency management software.
FAQ
What is the role of project financial management?
Project financial management plays a critical role in ensuring the efficient and effective use of financial resources throughout a project’s lifecycle. It involves planning, organizing, controlling, and monitoring financial resources to meet objectives and deliver value. Effective project financial management helps in making informed decisions, managing risks, and ensuring the project is completed within budget and on time.
What does a project financial manager do?
A project financial manager is responsible for all key budgeting initiatives. This includes formulating estimations, managing risks, tracking key performance indicators, and delivering timely financial reports to stakeholders.
What are the processes of project financial management?
Project financial management encompasses several key processes: budget planning and allocation, which involves estimating costs and setting a budget; financial tracking and risk management, which entails monitoring expenses against the budget and accounting for internal or external changes; and financial reporting, for providing transparency and accountability across project stakeholders.
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