With project-based work, a primary concern will always be an organization’s bottom line. Achieving your target is even more critical when working in an agency environment, where every project must earn approximately 30% net profit to ensure company solvency. Managers oversee budgets, so strong project financial management skills are essential to your professional development.

There are various methods of financial management, but some components are essential no matter the system you choose. You should learn to estimate project costs, track spending, and translate financial data into metrics and key performance indicators (KPIs) to help visualize effectiveness. Once you understand the fundamentals of managing project finances, you can set your team up for success and drive profitability for the organization while evolving your practice.

What’s project financial management?

According to the Project Management Institute (PMI), project financing in project management is the administration of all financial aspects within a project, including funds and resources, revenue, and profit.

Also known as “project accounting,” the most critical task of this management component involves budget setting and administration over the project lifecycle. You must continuously manage project finances to ensure team members deliver the required outcomes using only the resources allocated. This can be a lot of work, so some PMOs dedicate specific project managers exclusively to financial portfolio management.

Why is project financial management important?

To lead teams to successful outcomes, managers rely on project financials to establish the project plan, estimate costs, and allocate resources. Inconsistent or deficient financial management can result in:

  • Cost overruns
  • Unpredictable staffing hours
  • Inadequate resource oversight
  • Cash flow issues

Additionally, a team’s budget is a core constraint they must effectively manage, alongside project quality and speed. If leaders alter the project’s budget, it impacts scheduling and deliverable quality, making it challenging to meet stakeholder expectations.

Taking steps to manage project financials also helps teams balance:

  • Expected return on investment (ROI)
  • Concurrent projects and their effects on one another
  • Overall project effects on the company

In addition, financial management offers the following benefits.

More project clarity

Managing project finances is critical to its execution, as it gives leaders key metrics to gauge performance and helps managers build a budgeting roadmap. And accurate metrics provide insight into a project’s status, while roadmapping helps keep it on track to meet profit and organizational goals.

A big-picture perspective

When actively managing project finances, leaders develop a more complete picture of the potential ROI, helping determine which projects will most profoundly impact the business’s health. Identifying and prioritizing initiatives with the highest profit margins ensures teams have the resources to meet or exceed client expectations, establishing relationships that drive repeat business.

Better resource management

Financial resource management techniques help managers allocate staff, materials, and equipment to meet the project’s strategic goals. Suppose overall resources are scarce and you must strategically distribute them. With effective financial management practices in place, you can easily consult the task budget and allocate funds based on each task’s placement on the priority list.

Less scope overrun

Scope creep is one of the top reasons projects run over their allocated funds. Having a set budget allows you to reasonably decline change requests that affect project scope, which could damage your net profitability.

Potential challenges with project financials

The primary concern of financial planning is having access to valid historical data for budgetary forecasting and decision-making. Without this context, your estimations may be inaccurate.

Another challenge is ensuring project spending remains within the allotted budget. That struggle can result from the following issues.

Monitoring incorrect metrics

A typical financial challenge is knowing which and how many project metrics to track. Using faulty or too many measures over-complicates the decision-making process. Focus instead on a few financial metrics that provide the best insight into project progress and ROI.

Poor tracking methodologies

Another common error is not centralizing financial tracking within a single, accessible tool. Using multiple platforms or spreadsheets makes it hard to monitor spending consistently and increases the likelihood of error.

Instead, consider integrating financial management software into your project management tool to track details like:

  • Revenue
  • Project cash flow
  • Earned value
  • Profit

Financial project management software also streamlines forecasting and stakeholder reporting, reducing your workload.

Inconsistent data

You don’t want to close out a project wondering where all the funds went and why you missed your financial targets. Inconsistently measuring project data is the root cause of questionable budget results. Financial managers may calculate actual costs, revenue, and profit using different formulas, which leads to unreconciled results.

Financial planning during a project’s initial stage helps you avoid this unfortunate circumstance by establishing rules and formulas to calculate financials. You can also leverage your financial management software’s dashboard to crunch numbers and visualize data.

Improperly managed risks and change requests

Scope creep and unanticipated challenges can quickly lead to cost overruns. Take time during project planning to establish a risk management and change control process. This gives you an action plan to address an issue or client request without impacting the budget.

How to improve project finance management: 6 steps

Becoming an adept financial manager for your projects takes practice. Start to build your skills by taking these essential steps.

1. Track the correct metrics

Monitoring the correct business and project-specific metrics helps you identify and prioritize work that contributes to the company’s financial goals. Some metrics to consider include:

  • Actual cost (AC): This metric calculates the money spent on a project by adding all the expenses team members accrued over the life cycle.
  • Earned value (EV): To check a project’s performance, calculate the EV within a specific timeframe and compare that number against the period’s approved budget.
  • Cost performance index: Evaluate the accuracy of your budget estimates by dividing the work completed (EV) by what you’ve actually spent (AC).
  • Cost variance: Determine the difference between the planned funds and spending actuals within a selected timeframe. If the value is negative, you’ve overrun the budget.
  • Return on investment: ROI determines the benefit derived from a project’s expenses, such as training, overhead, and resources. It does this by comparing the profit generated against the amount of money the organization invested in the initiative.

2. Implement project accounting software

Improve cost tracking and management accuracy by integrating financial project management software into your practice rather than managing multiple spreadsheets that leave more room for human error. A digital tool will streamline:

  • Financial planning
  • Metric monitoring
  • Resource tracking
  • Timesheet documenting

The software also lets you customize your dashboard to include relevant project metrics and KPIs. By using real-time updates, you can quickly review your project’s financial performance and make better-informed decisions.

3. Establish a baseline

A cost performance baseline is an estimated budget over a specific timeframe within the project lifecycle. Establishing this benchmark is critical to prevent overspending — it lets you track generated revenue as an indicator of overall project performance.

Consider your approved budget, then determine the estimated breakdown of planned costs according to:

  • Project schedule and scope: All the work team members complete within a defined timeframe and corresponding to a set budget.
  • Allocated resources: The tools, staff, and materials necessary to complete various tasks.
  • Contingency funds: An estimate of financial reserves for covering unexpected expenses accrued during project execution.

4. Focus on profitability

In addition to spending the project’s budget wisely, financial management should focus primarily on driving profitability and business growth. Maximizing a project’s profitability is achieved by concentrating on stage-wise ROI. The team must take the necessary steps to prevent cost overruns and deliver project outcomes on time and within budget.

5. Document expenses

Record every expenditure within your digital management tool to oversee a financial plan effectively. Documentation ensures that financial tracking is up-to-date and you have accurate data for informed decision-making.

6. Implement a change control process

Implement a change management process as part of project controls to prevent scope creep from consuming your budget. Make sure the client understands how the process works and the financial implications of their request. Also be sure to document their consent to changes so that when you conduct the project post-mortem, management understands why costs deviated from the estimated value.

The best tools for project finance management

Whether working on your own or with an accounting expert, leveraging the power of roadmapping leads to increased project financial management success.

Tempo Strategic Roadmaps lets you create a project roadmap that visually itemizes tasks to improve estimation, prioritization, and budget allocation. When combined with Timesheets, Tempo’s resource and time tracker, and Financial Manager for spending management, you’ll have everything you need to ensure profitability — whether you work in IT, product, or project management.