Importance of Tracking Financials
There is not a company in the world that can afford to waste money on projects that generate insufficient return. Increasingly, a key role played by project managers is tracking the financial investment and return on their projects.
Four common metrics are net present value, internal rate of return, payback period, and cash hole. Net present value (NPV) answers the question, “How much money will this project make or save?” NPV estimates the present value of all current and future cash flows resulting from the project. In other words, what are the long-term results from this project worth today?” Internal rate of return (IRR) projects how rapidly an investment will be returned. Payback period estimates how long it will take to reach a breakeven point. Cash hole (also known as the maximum exposure) is an estimate of the largest amount of money invested at any point in time.
These metrics are all part of a complete financial analysis. Estimates done before a project are essential for helping your management decide which projects are worthy of investment and how that investment will affect your company’s finances in both the short term and the long term. The assessment will be valid only if the analysis includes all the ways in which a project will affect revenue, growth, and expenses. The figures should be updated during and after a project as your knowledge improves about what it will take to achieve the financial goals.
Participate in the financial analysis by helping to:
Estimate cash inflows: Think broadly to identify all the ways in which your project may help increase dollars taken in or the portion of those dollars your company can keep. Consider increased revenue from higher sales, greater margins due to lower operating costs, material savings, and waste reduction.
Estimate cash outflows: Identify any expenditures incurred for the project, including salaries, material, equipment, IT, external consultants, etc. Think too about ongoing expenses that may result, such as increased operating costs.
Construct a cash flow table: Summarize outflows and inflows by year (or by quarter, depending on your industry). Work with internal financial experts to identify the discounted value if your project results will accumulate over years, to account for inflation.
“Although you may not be intimately involved in completing a full financial analysis, as a project manager, you should understand how it’s done and the terminology involved.”
Project and Portfolio Management Software like WorkOtter, in addition to providing a wide range of tools to manage projects and resources, allows PMs to perform complex financial analyses before, during and after projects. Consider signing up for a free demo today.
“Project Management: 24 steps to help you master any project” by Gary R. Heerkens is a copyrighted work of McGraw-Hill and McGraw-Hill reserves all rights in and to the Content. ©2007 by The McGraw-Hill Companies, Inc. Purchase the book on Amazon.