Project Financial Management is the process of estimating and justifying costs in order to secure funds, controlling expenditure and evaluating the outcomes. This process brings together planning, budgeting, accounting, financial reporting, internal control, auditing, procurement, disbursement and the physical performance of the project with the aim of managing project resources properly and achieving the project’s objectives.  The financial structure of projects, programs and portfolios takes many different forms but the financial management process is common to all.

Process Overview

“Be aware of little expenses. A small leak will sink a great ship.” Benjamin Franklin

Many organizations are project based and even a start-up business venture is a project, or a group of projects. Every project has a cash cycle: Financing, Investing, Operating, and Returning. In this cycle, a project acquires the cash it needs to begin, uses the cash to grow and operate, and returns the cash it owes to its creditors and owners. In the Financing Phase a business attracts the capital it needs to get started. In this phase upper management decides how to invest company’s money by approving a few selected projects. The Investing Phase begins when the business invests this capital in the labor and equipment necessary for development. In the Operating Phase the company begins to use funds generated by operations in addition to raised capital. In the final or Returning Phase, the company pays back interest on loans or provides a return on investment to shareholders.

A project may be stand-alone or be part of a program; it may be an internally sponsored and funded project; or a project performed by a contractor on behalf of a client. Programs will need to consolidate financial data from three sources: the projects, the business-as-usual activity and the program management infrastructure. Program funding is required to support the program through the initiating and planning phases, until cost and budgeting are researched later. The project budget is part of departmental budget, which in turn is constituent of organization wide financial financial planning. If Companies do not generate enough cash, they take on capital. The cost of capital for financing is driven by the expectations of lenders and shareholders. Lenders issue debt and shareholders own equity.

Project Charter

Project charter is the most important document in making the decision to invest in a project.  Project charter documents the project purpose, the measurable objectives and success criteria, the high-level requirements, high-level project description, high-level risks, summary milestone schedule, the summary budget, project approval requirements (what is project success, who decides it and who signs off), assigned project manager (responsibility, authority level), and name and authority of the project sponsor or other individual(s) authorizing the project.

Project charter relies on the “project statement of work” that addresses the business need, the product scope description, and the organization strategic plan (especially the way that the project helps fulfill the strategic vision) and on the “business case” that provides the necessary information that is needed from a business standpoint. The business case is a consequence of (or a combination of) a market demand, an organizational need, a costumer request, a technological advance, a legal requirement, an ecological impact, or a social need. Typically, it includes the business need and the cost-benefit analysis.

Cost Management vs Financial Management

Cost is fundamental to determining the budget, the cost baseline, and the earned value management (EVM), since it compares the planned value on the budget with the real cost on the accountancy. During the early phases, funds may only be committed in principle, pending a more detailed understanding of the work. Work is approved if it can be shown not only that the benefits outweigh the costs, but also that the organisation cannot get a better return by investing the same funds elsewhere.

For a project to be completed within the approved budget, several process are employed. these processes are : Estimate Costs, Determine Budget, and Control Costs. Estimate Costs is the process of developing an approximation of the monetary resources needed to complete project activities, and Determine Budget is the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. Control Costs is the process of monitoring the status of the project.

Estimating Costs involves forecasting the total amount of people, equipment, materials and other expenses needed to deliver the project as well when in the project plan, these expenses will take place. The budget shows the expense accounts, allocates capital versus expense dollars, shows when funds are allocated to your project, etc. A contingency budget could be included to cover the estimating uncertainty. Cash flow analysis is used to examine the schedule for the program’s revenues and expenses in order to understand the balancing of the projects.  Other tools and techniques include cost benefit analysis, such as net present value (NPV), discounted cash flow (DCF), internal rate of return (IRR), cost benefit ratio, payback, and options analysis, scenario and probability analysis, and quantitative analysis for examining resource loading requirements or cash flow. These are documented in the business case. As work proceeds, cost-control mechanisms need to be implemented. These will forecast when funds need to be released and track progress of actual expenditure against planned. A KPI, or Key Performance Indicator, is a tool that ascertains how much has been spent on a project, the extent to which the project’s actual budget differs from what was planned, and so on. The most common KPIs that are essential to effective project budget management:

• Actual cost (AC): This is the actual cost of work performed (ACWP) which shows how much money has been spent on a project to date.
• Cost variance (CV): This is the estimated project cost is above or below the set baseline.
• Earned value (EV): This is the budgeted cost of work performed (BCWP)which shows the approved budget for performed project activities up to a particular time.
• Planned value (PV): This is the budgeted cost of work scheduled (BCWS) which is the estimated cost for project activities planned/scheduled as of reporting date.
• Return on investment (ROI) shows a project’s profitability and whether the benefits have exceeded the costs.

In Chapter 15 of the Construction Extension to the PMBOK^® Guide–2000 Edition (PMI, 2003), Financial management is presented as the processes to acquire and manage the financial resources for the project, and it is more concerned with revenue source and analyzing and updating net cash flows for the construction project than is Cost Management. Cost Management is stated to be related more to the management of the day-to-day costs of the project for labor and materials, while financial management is more oriented towards the analyses of the net cash flow.

Small and medium-sized projects will be serviced by the accounting systems of the host organisation. Local processing is needed to aggregate and apportion costs according to the project structure.