What is importance of financial analysis in project management?

One of the most common challenges to project management is the failure to correctly estimate expenses. In fact, a study conducted by Deloitte reports that 22% of professionals consider budgeting issues to be a key roadblock to project implementation. These statistics indicate that the availability and sound management of the business’s finances contributes significantly to the success of the project.

To that end, it becomes a vital step for organizations to conduct thorough financial analysis, and efficiently calculate, estimate and monitor costs, throughout the lifecycle of the project.

What role does financial analysis play in Project Management?

According to Investopedia, financial analysis is a method used to examine economic trends, set financial policies, construct long-term business plans, and identify ideal companies or projects for investment.

Financial analysis is conducted not just during the initial planning phases of the project, but throughout the project lifecycle. Three prominent stages in financial planning in project management include:

Creation of an estimate: Following a cost benefit analysis process, which confirms the project’s viability, an estimate is created prior to commencing the project. The estimate is determined on the basis of various models including reserve analysis, time & materials analysis, fixed price estimates and cost of quality analysis.

Supervision of project progress: Project managers need to be vigilant regarding any deviations from the budget. Financial analysis allows them to address any such deviations, by regularly comparing the amount of money spent with the budgeted amount.

Post-project analysis: Upon completion, a post-project financial analysis is conducted, with the aim of determining how profitable the project actually was.

In other words, financial analysis is carried out to identify the financial merits of projects, via calculation of their past, present, or future value. While financial analysis focuses largely on ratio analysis to highlight a project’s profitability, other metrics may be involved as well, depending on the scope of the issue that needs solving. Real-life management issues especially call for financial analysis that goes beyond simply assessing a project’s profit.

Thus, financial planning in project management can also involve the careful analysis of some of the following:

• Planned Cost, Profit, and Revenue

These numbers are the baseline against which financial progress is generally tracked when a project is in execution. These numbers can help visualize a clearer picture of the total amount of money paid by the client to the company for specific services.

• Variance to Plan

Financial analysis of this metric can provide a deeper understanding of the accuracy of the project plan, by highlighting how finances planned for project expenditure differs from what is happening. In the event of a notable difference, it allows analysts to identify where the problem lies and correct it along the way.

• Hours registered and remaining

Project managers also stand to benefit from analysing how many hours have been registered for a particular project, as well as how many more are required for completion. These metrics are especially useful not just during the execution phase of the current project but also in the initiation phase of upcoming projects.

Common challenges faced by project managers and how a Project Financial Management System can help

In any given scenario, there are certain roadblocks that project managers may face during the project lifecycle, chief among them being budget overruns. Budget overruns can occur as a result of any number of reasons, from underfinancing, to prolonged project schedules, to lack of resource planning, among others.

Thankfully for organizations, there is a solution for these potential issues, Project Financial Management. Project Financial Management is essentially a process that combines planning, accounting, budgeting, internal control, financial reporting, procurement, disbursement, auditing, and physical performance of a project, aimed at ensuring proper management of the project’s resources and achievement of project objectives.

The integration of robust Project Financial Management systems contributes to this, by enabling project-centric organizations to make sure that each daily event or activity that could potentially influence the financial status of the project is properly captured, analyzed and reported on a timely basis.

Having the know-how regarding the implementation of efficient financial analysis throughout the lifecycle of a project is a skill set that is becoming increasingly important for project managers in every business sector. Tools like TouchBase which offer robust solutions including Project Financials and Enterprise Budget Management are designed for this, by facilitating sound decision making regarding project viability, as well as ensuring that projects are carried out within the estimated time, scope and budget parameters.