Perform a Financial Analysis


Our blog series – “Master Project Management” covers some of the essentials of the art and science of project management. It talks about defining true needs, building a solid team, and performing a financial analysis. It addresses how you can find the right balance points between extremes like “managing everything vs. managing nothing” and “doing work yourself vs. letting the team do everything.” This series will help develop the foundation you need to become a high performing project manager.

Perform a Financial Analysis

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.

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.

WorkOtter helps you successfully execute your program process strategy for project success. Get a demo of WorkOtter and see how we can make your program management effective.

Next Step: Terminate Unworthy Projects

“Project Management: 24 Lessons 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. Purchase the book on Amazon.