Think of the last time your project was over budget. Given that it only takes one spending mistake for everything to spiral out of control, it was probably recently. More often than not, this leads to projects failing or deliveries being made late, leaving project managers questioning what went wrong.

Fixing the problem is not as easy as saying, “we will spend less money next time.” In this blog, we highlight the challenge of project financial management and also provide tips on how to improve project financial management.

What is project financial management?

Project financial management is the art of handling all the financial aspects of a project, from surplus funds to expenses. This process involves estimations, budgeting, risk management, and financial reporting.

Accounts must be monitored, bills must be paid, and employees must be paid. Someone must manage all financial transactions, such as expenses or payments received, throughout the project’s existence. During the planning process, you will select whether that person is the project manager or another designated team member.

The fundamental purpose of project financial management is to ensure that projects are completed within the allotted budget while achieving the major objectives. Accomplishing these objectives requires successful:

• Planning
• Budgeting
• Billing
• Accounting
• Funding
• Expenses tracking
• Resourcing

The importance of project financial management

Effective financial management helps project managers optimize resource allocation, manage risks, and make educated decisions based on real-time economic data. Doing it properly can be the difference between making or losing money.

When managing a project’s finances, you will need to spend money to make money. Smart investments may result in some short-term outcomes while also introducing new resources and possibilities that will benefit the organization for many years.

Project financial management, when implemented effectively, can assist a business in steadily growing while avoiding common budgeting pitfalls that can disrupt the operation. For example, if you do not accurately scope the hours required by the development team to build a new product feature, you have one of two options;

• Either bring in a new team member or;
• Push back the deadline to ensure the current team has more time.

However, both options will definitely cost you either the hours required to add human resources to your project or the costly delay, in financial terms, of not delivering.

Being aware of the possible expenses caused by these interruptions and how to address them can prevent you from excessive spending while resolving critical issues.

Project financial management in the project lifecycle

Typically, the financial management of a project is carried out in stages that align with the different phases of the project’s lifecycle.

1. Initiation phase: Assessing the financial feasibility of the project about the business’s capacity is necessary before its approval.
   
2. Planning phase: Project financial management begins during the planning of the project. Allocations of project expenses and budgets are synchronized with the primary milestones and their corresponding timeframes.
   
3. Execution phase: As the project team focuses on completing their assigned tasks, it is imperative to keep a watchful eye on the budget for any deviations in costs and expenses.
   
4. Closure phase: A financial review needs to be conducted when the project is complete to assess the return on investment (ROI) and the overall financial impact of the project.

What are the benefits of project financial management?

Finance plays an important role in project management since all projects have to be properly planned in accordance with the budget. Moreover, financial planning enables effective organization and management of multiple projects, leading to business expansion.

There are several other advantages to overseeing your project’s finances, such as:

Providing key metrics and a roadmap

It will be extremely difficult to reach a new destination without a roadmap, as we will either take a longer route or get lost. If there are no appropriate financial metrics or if the existing ones are inadequate, a project can encounter similar problems. Financial data is often scattered across different emails and spreadsheets, which increases the potential for mistakes and makes tracking expenses challenging.

Project financial management effortlessly consolidates essential metrics and financial planning into a single platform, furnishing you with the means to manage your project from beginning to end. With insights on pertinent performance indicators, you can keep tabs on the progress of your project while protecting against excessive spending.

Prioritization of projects

By incorporating financial evaluations and planning into project management, your company can determine which projects will yield the greatest return on investment (ROI) and prioritize accordingly. This approach ensures that business-critical initiatives receive sufficient resources and attention to deliver final products that exceed client expectations.

Thus, by understanding the ROI of projects, you can pinpoint the appropriate customer profile. It allows for customization of marketing and sales programs to appeal to and convert them while ensuring that high-priority projects have access to top resources.

Reducing cost overruns

Project financial management helps in mitigating the likelihood of exceeding the budget. This process involves delving into precise cost estimates during project planning instead of relying on approximations.

Monitoring actual expenditures throughout the implementation phase will enable you to minimize discrepancies and keep a close watch over expenses incurred along the way.

Common challenges with project financial management

Managing a project’s finances is a tedious proposition, requiring critical thinking, analytical and problem-solving skills.

To begin with, as a project manager, you have to figure out financial management methods that are efficient, such as streamlined accounting and reporting procedures. Then you must monitor and adjust the processes throughout the project, balancing cost savings and quality productivity.

Below are some common challenges that you will face when planning and managing the finances of your project;

Unexpected costs

You can meticulously plan a project, but unforeseen expenses can arise, throwing the budget into disarray. They may be caused by macroeconomic factors such as economic shifts or natural disasters. Lower-level costs, on the other hand, may arise from employees leaving, errors in procurement and legal disputes.

Inaccurate budget forecasting

Budgeting is a tricky practice by nature, requiring near predictions about future events, namely the cost of materials, labor and other expenses. You will either underestimate or overestimate your project’s budget should your budget predictions miss the mark.

Cash flow management

Even if the overall budget is accurate, delays in funding or payment can halt any progress. It is challenging to successfully sustain a continuous cash flow, especially in projects that are dependent on milestone-based expenditure or funding from external sources. Utilizing financial project management tools can also aid in providing real-time insights into financial performance, even when it comes to managing offshore investments.

Scope creep

Stakeholders might demand some additional features or changes that were not initially accounted for as the project progresses. Such a situation is called ‘scope creep’ and it results in the costs of a project ballooning out of control if they are not proactively controlled.

Communication barriers

Clear communication between all parties is a prerequisite requirement for effective project financial management. Thus, your project’s financial balance will be disrupted due to duplicated efforts, missed payments, or misallocated funds resulting from a lack of transparency or misunderstandings.

Best practices for project financial management

There is more to project management than counting pennies, it involves understanding where every penny is going and why. You will need to implement the best practices into your processes to improve your project’s financial management while also keeping your budget on track. Here’s how you can achieve that;

Prioritize financial planning

To improve your project’s financial management, the first step is to review the project timetable and also calculate the overall expenses. They may include direct costs, like raw materials, labor, and equipment, and indirect costs, namely overhead, logistics, and contingencies.

Ensure that you have adequately planned for any cost overruns and unforeseen expenses that arise when the project has commenced. Collect all essential data on performance measures, market trends and other significant factors to accurately project finances. You must also consider previous projects by utilizing historical data to produce a reasonable financial forecast.

Analyzing market conditions, competition, and sales forecasts with revenue predictions will give you a more comprehensive understanding of your potential revenue.

The incorporation of predictive analytics, such as Microsoft Power BI or Tableau software can enhance your financial forecasts. These platforms examine vast amounts of data and can detect trends from previous records while estimating potential expenses with accuracy.

It is advisable that before using predictive analytics that you make sure the historical data is reliable. Inaccurate data can lead to financial gaps, misallocated resources, and missed strategic opportunities.

Create a safety net

As a project manager, you will inevitably encounter unforeseen costs. A precautionary measure against these unforeseen costs is to set aside between 5% to 19% of your entire project budget for a contingency fund.

When creating a financial safety net, you need to;

• Conduct a thorough risk analysis
• Take into account potential cost overruns
• Consider delays
• Examine market volatility
• Look for other unexpected circumstances, such as employee illness or departure

Make time for project pulse checks

Financial audits and the monitoring of project finances constitute regular project pulse checks. You need to conduct assessments during these pulse checks to assess the components of your project management triangle, which are;

• Project scope
• Cost of budget
• Time

Financial track templates or software, like QuickBooks or FreshBooks, ensure that it is easier to have a real-time view of the financial well-being of your project.

To ensure that the finances of your project are in good standing, you must be proactive as it’s easier to implement course corrections than to start a new journey.

Additionally, it will be easier to identify any potential economic problems from the start when you conduct regular financial evaluations. It will offer you the opportunity to change your plans accordingly so you make informed decisions that sustain your project’s well-being.

Prevent scope creep

When the project’s objectives are increased excessively without the implementation of adjustments to the available time, cost, or resources, it is called scope creep.

A quiet budget killer in projects is agreeing to all of the requests made by all stakeholders. Pleasing everyone will win you favors, but it will also lead to the financial ruin of your project.

To avoid scope creep, you must articulate clearly the project boundaries and get the approval of all stakeholders. Using project management software, such as Backlog, enables you to trace and announce project copes changes, ensuring your team is always kept updated.

Utilize financial management software

Advancements in technology have rendered manual tracking obsolete, making automation the future. With innovative modern software like Xero, processes such as billing management and finance monitoring can be automated, giving you more time for strategic analysis.

Maintain transparency in all financial practices

When you conduct regular financial reviews, you will be able to detect any budget discrepancies and it also will allow you to implement corrective measures. Your evaluations must assess all aspects of your project’s finances, including expenses, predicated expenditures, and your budget’s overall health.

Final thoughts

Mastering project financial management is not just about crunching numbers; it’s about leveraging resources strategically to drive value and maximize outcomes.

By adopting a proactive approach, embracing transparency, and integrating best practices into every stage of the project lifecycle, you can navigate financial complexities with confidence.

Remember, when your data is organized and simple to read, project financial management is easy.  Through a commitment to refining processes, fostering collaboration, and staying attuned to evolving trends, project managers can position their projects for long-term success.

Author bio

Abelino Silva is an accomplished writer known for their captivating storytelling and insightful commentary on contemporary issues. With a background in tech and finance journalism, they bring a unique perspective to their work. When not immersed in the world of words, Abelino enjoys hobbies such as hiking, photography, and cooking. They currently reside in Argentina with their dogs.