Meaningful Project Financial Reporting, Simplified - Baselining

Financial Management is key to managing project resources properly and achieving the project’s development objectives. Financial Management is a process which brings together planning, budgeting, accounting, financial reporting, internal control, auditing, procurement, disbursement and the physical performance of the project. The Project Financial Management Plan is part of the Project Management Plan to deliver on time, on budget and with quality.

This article discusses simple steps to create a Financial Management Baseline (FMB) which is the project budget. FMB can be used as a critical tool to monitor project finances, measure performance, report reliable progress (or lack thereof) and provide realistic forecasting based on actuals to-date. It helps to control the project and identify problems early, so they can be resolved before the?project is adversely affected. A future article will discuss using the FMB to monitor, report, forecast and to mitigate risks.

?Financial Management is covered heavily by the Project Management Institute (PMI) in its Seventh Edition of its Body of Knowledge (PMBOK7). PMI extensively reorganized its project management approach by replacing?the concept of Knowledge Areas in PMBOK6 with Project Performance Domains in PMBOK7. See figure below, property of Project Management Institute, for a summary of PMBOK7 domains.

PMBOK7 covers Financial Management of a Project primarily in project Performance Domains called 1) Planning and 2) Measurement. This article is focused on the financial management baseline that applies to PMBOK7 Planning domain. A future article will discuss ways of using this baseline for the Measurement Domain.

Project Manager Role in Financial Management. Project manager (PM) is responsible for delivering the agreed-to product on time, ?within budget with acceptable quality.

PM manages:

• Time
• Cost
• Schedule
• Scope and quality of deliverables
• Client and project sponsor satisfaction

Expectations from the PM:

• Successfully complete all aspects of a project based on its requirements and specifications
• Meet or exceed planned financial goals
• Manage, predict, and measure the financial outcomes of your decisions
• Achieve your gross profit, which is tied to other financial responsibilities

Project financial life cycle. Primary output of the Project financial management is the project Budget. The Project Financials are

• Started during Opportunity Management, not when the contract is signed
• Estimated and created during Solution Design (proposal),
• Baselined during the Project?Start-up Phase,
• Monitored and Reported during Project execution, and
• Closed during the Closing Phase.

Major Steps to Creating the Project Price During the Proposal. To arrive at a price for the customer, the proposal team performs the following tasks:

1.??????Gather requirements

2.??????Define the project scope

3.??????Define the deliverables

4.??????Create a Work Breakdown Structure (WBS), Organizational Breakdown Structure (OBS), and Product Breakdown Structure (PBS)

5.??????Estimate the original cost (OCE)

6.??????Define the level of risk and assign a contingency fund

7.??????Develop schedules of costs, payments, and revenue

8.??????Send the proposal to Pricing so they can determine the project price

9.??????Negotiate and sign the contract

Major Steps to Create the Financial Management Baseline (FMB). After contract signing, the Project Manager cannot just assume that the pricing from the proposal phase is still good. Factors over time between the proposal and signing impact pricing. These are the recommended major steps for a Project Manager to create a Financial Management Baseline to establish the project budget.

1.?????Start an initial WBS or use the one from the proposal phase if available and modify as needed.

2.?????Identify the key components that can affect the FMB. Consider hardware, software, applications licenses, labor.

3.?????Identify other key components that can affect the FMB, such as royalties, original equipment manufacturer costs, travel and more.

4.?????Categorize costs according to how they related to the project.

5.?????Clearly differentiate all these components.

6.?????Publish the final WBS.

7.?????See table below for a typical WBS that should work for most IT projects. This is the initial WBS with all the associated costs by activity.

8.?????Review and revise the cost WBS above with key stakeholders and leaders for accuracy.

9.?????Once you are comfortable the cost WBS, show the expected costs month-by-month. This is the Financial Management Baseline.

10.?See the table below that uses the WBS above to give you the FMB:

What is next? FMB shown above is the starting point for Financial Management steps during Project Execution. In a future article, we will discuss these which are project budget,?project revenue, project budget targets, reporting status, using Earned Value (don’t worry, I have a simple approach) for variance analysis, financial forecast and risk management.

Appendix - A Short Discussion on Financial Management Terms. In order to keep this article short, please refer to the Internet as a good source for Financial Management terms. It is important, however, to note the following:

The?direct cost?can be directly traced to the finished product: The labor, raw materials, subcontractor labor, third-party hardware and software, and other costs associated directly with the project.?

The?indirect cost?might benefit many products instead of just one. Because more products are involved, indirect cost is not as easy to trace as direct cost.? An indirect cost is usually less visible to the project manager. It might accumulate for some time before it is charged against, or allocated to, the projects supported by the cost.??

An?expense?is an amount paid or spent regularly towards ongoing business operations to ensure revenue generation.

Expenses and costs are not the same. Cost is what is spent to make a product. Think of cost as the expenditures necessary to put a product or service on the shelf, ready for sale. Expense what it takes to sell it.

Gross profit?refers to the money?a company earns?after subtracting?the costs associated with producing?and selling its products. Gross profit is represented as a whole?dollar amount, showing the?revenue earned after subtracting the production costs.

The?gross margin?is the percentage of the gross profit earned from revenue.?It illustrates how well?a company?is?generating revenue from the costs involved in producing their products and?services. The higher the margin, the more effective the company's?management is in?generating revenue for each dollar of cost.

Note that the term?gross?includes only costs, not expenses.

The price or target revenue is also calculated with the gross markup. Pricing multiplies the cost by a factor that is called?gross markup?to come up with the final price. Project Revenue = Cost x Markup.