Finance is the lifeblood of every project or organization. In order for money to generate money and bring more profit, effective project financial management skills are one of the most important skills for CEOs. Because, when the money is exhausted, the project goes bankrupt. So what is project financials and how to manage it effectively? The following article will answer these questions for you.
What is project financials?
Finance is a relatively independent mode of movement of money with its functions and storage facilities, its characteristic in the field of distribution is the creation and use of different monetary funds for different purposes of accumulation and consumption.
Project financials is a term used to describe important tools and jobs in the financial system of a project. Activities are related to raising capital and using that capital to invest in assets in a project to generate profits for project owners.
Based on the financial information of the project, the project leader will manage the cash flow in the project for activities to generate profits.
What is project financial management?
In economics, financial management of projects in the planning, organization, direction, and control of financial activities such as procurement and use of the enterprise’s monetary funds for necessary activities.
Corporate financial management and accounting and finance are two closely related activities, reflected in the management of financial statements. Financial management needs to apply general management principles to the financial resources in the project.
Financial management is one of the most important jobs of the head because effective financial management not only helpsprojects maximize profits but also supports project growth.
Principles of project financial management
Each business or project will have its own way of financial management, financial management will depend on the size and field of the company. But there are still principles of financial management that are common to most projects. The following are the principles and functions of corporate financial management today.
- Review capital requirements
The financial manager of the project needs to plan the budget related to the company’s capital requirements. This planning will anticipate the costs and profits brought in from the implementation plans in the year.
- Determine the capital composition
Once the budget plan has been completed, the financial manager needs to restructure the capital. Capital restructuring is closely related to the analysis of long-term and short-term liabilities. This will determine whether the company can use its own funds to solve the problem or whether it needs to supplement funds raised from outside.
- Efficient cash management
Cash management is considered an important principle in financial management. The cash of the project is used to pay salaries, pay debts, maintain stocks, buy raw materials, etc. Failure to manage cash effectively will make it difficult for projects to manage.
- Choose the suitable source of capital
In order to bring more profits to the project, managers need to consider and make many options such as: Issuing bonds, stocks, loans received from banks, etc. Choose a suitable form. It will help the project to be more profitable and avoid risks.
- Smart investment
Having a clear and accurate plan for investing in profitable projects will help projects get a significant source of profit. But if you invest in the wrong way, your project will have to suffer to pay its debts.
- Consider the value of money
Before deciding to spend a large amount of money, besides learning about the profit it brings. Projects need to learn more about the value of money (increase and decrease) over time due to external factors such as inflation, etc. to allocate cash flow accordingly.
- Control all activities
The financial manager must cooperate with other administrators in the project, to ensure the effective operation of the project. Every project result has financial implications and it needs to be fully taken into account before implementation.
Importance of project financials management
Project financial management is more precisely the management of cash flow in and out of the project, each project will have its own way of managing its own finances in the most effective way. But the role of financial management for projects is the same. The following are the roles and goals of financial management for projects.
- Decide the growth and existence of the project.
- Manage cash flow in and out of all production and project activities of that project or organization.
- Planning the financial plans of the project.
- Decide on investment and financing categories.
- Make it easy for projects to earn profits from equity or borrowed capital.
- Maximize after-tax profit target.
- Maximize the return on equity.
How to effectively manage project financials
Many projects have to go into bankruptcy or are overwhelmed by debt because they do not know how to manage their finances effectively, and here are the most effective ways to manage finances that you should refer to for your project to avoid unnecessary losses.
Systematic financial management
The systematic management of project finances will help your project grow at its best. All loans, receipts, and expenditures, salaries, investment expenses, etc. need to be tracked in great detail. Using financial management software is the most essential for large projects or businesses that want to manage their finances in detail.
Clear revenue and expenditure
The revenues and expenditures of your project need to be clearly understood, having a clear revenue and expenditure plan will help you manage your cash flow more accurately, avoiding a budget deficit. In order to avoid debt, you should not spend more than the profit that the project makes.
Continually invest the free money of the project in profitable projects, which will create more profits for the project. Efficient, high-return investments will generate huge cash flows.
The balance between risk and return
A good financial manager will certainly know how to balance risk and return: A small amount of risk will bring a small profit, and a large amount of risk will bring you a large return. If you want to bring in a large profit for your project, you must accept a great risk.
Pay attention to taxes
Everyone knows which of our returns are taxed by the state, so it’s essential to consider tax-affected investments right from the start.
There is always a backup plan
No matter how good your options are, unforeseen circumstances can happen. Equip yourself with plan B in advance with backup savings, use insurance services, so that you can easily overcome unexpected crises such as: losing business, being cheated, due to natural disasters, fire,… Having an extra plan B, C or D is something most financial managers have to do.
Use financial management software
According to surveys of financial experts, about 95% of medium and large enterprises use financial management software for their projects. Financial management software brings many benefits to projects such as:
- Easy capital management
- Capital management and capital structure
- Clear revenue and expenditure management
- Make payments on time
- Make and approve budget plans easily
- Allocate resources appropriately for project activities
- Provide reports and KPIs to help control details of items, avoid overspending
- High-security system
Always have a reserve fund
Many project managers do not pay attention to building a reserve fund, leading to the fact that when there is a crisis, there is no financial “rescue”. The Covid-19 pandemic is a prime example of how we can have any project crisis that is unpredictable. The room fund will be a sufficient amount of money to keep the project running during difficult times or to invest in potential, one-of-a-kind opportunities.
Normally, projects will deduct part of their profits to build a reserve fund. This fund will guarantee the project to maintain normal operation from 3 to 6 months. To determine how much money is needed for the fund, start by dividing expenses by fixed and variable costs.
Make a specific business plan
A clear and detailed plan will show where the project is in the current market conditions and what goals the project wants to achieve. Financially, planning helps a project allocate the financial resources and project activities needed to drive revenue. Furthermore, let the project manager know how to get the capital needed to keep the project running.
Proper financial allocation is essential for project success. To do this, it is important to know where your project stands in the market, how much is the return on investment, how much is the profit achieved…. Answering these questions will help the manager better manage his finances.
An equally important principle for effective financial management is to prioritize debt reduction. Bad debts can be a pressure and affect revenue, short-term and long-term plans of the project. Therefore, projects should not carry these bad debts from year to year. Instead, they need to be wiped out to ensure a sustainable and stable financial situation.
Outsource services to minimize costs
To minimize operating costs, you can also consider outsourcing services to handle reports, taxes, etc., instead of needing an independent accounting department (however, this only applies for small projects with few employees).
Update reports regularly
Besides cash flow forecasting, project managers also need to regularly update reports to be able to grasp important business metrics. Once a month, you should compare receipts, expenses, loans, deposits, interest… if any, they will be handled quickly.
Mechanism of project financials management
Fixed asset management
It includes tangible fixed assets and intangible fixed assets. This includes managing in kind, managing quality, calculating and allocating depreciation of fixed assets, repairing, upgrading, and liquidating fixed assets. This is quite a difficult task because it includes solutions for the division of management responsibilities, use, depreciation accounting, and also management in terms of technical and technological aspects.
Management of working assets and working capital
It includes studying the conversion of current assets, structuring and classifying working assets, managing inventory, setting up and using reserve funds, setting discount policies inventory products, working capital flow model, capital turnover analysis skills, and working capital efficiency.
It includes cash use planning, borrowing, and debt repayment planning, organization, management, and control of cash funds at the head office and branches, organization of transactions with domestic and foreign banks, establish money safety policies when making payment transactions, especially electronic payment transactions.
Service trade credit management
It includes management of business methods, collection of money, use of service trade-credit software, management of debt and debt collection regimes, payment and purchase issues sell commercial services, use and manage financial-related utilities.
Project capital management
It includes the management of own capital, bank credit, and commercial credit, in addition, the management of stocks and corporate bonds, profits versus profits for reinvestment.
Management of investment decision making
Investment cost analysis is a model to calculate capital potential, investment ability, especially large-scale production and project investment. In particular, special attention must be paid to the analysis of profits and the analysis of risks in investment activities.
Sales and financial risk management
It helps identify and handle potential risks in the project in order to minimize losses.
Steps to effectively manage project financials
Want to effectively manage your project finances? Be sure to complete the following steps!
- Have a clear picture of the situation of the project
Before you start looking for ways to make your project more financially efficient, make sure to have a clear picture of your current financial situation. Make sure you track, understand and review all key performance metrics on a monthly basis to understand the financial performance of your project.
- Train financial staff properly
The first step to ensuring you are effectively managing your project accounts is to make sure that the people in charge of them are completely up to speed with both your internal processes and any financial software you use.
- Manage daily expenses
Even the most profitable projects can struggle if they don’t have enough money to cover day-to-day expenses. So every project needs to track and know their daily expenses. Expense management helps determine the spending of the project. It will allow you to plan your budget in place for the future.
- Pay your debts and expenses on time
There are costs that occur when you incur penalties for not paying your debt on time. These are unnecessary costs that can be avoided when planning for the future. Keeping accurate records will save your project time and money. Take notes when payments are due, set reminders for them, and record when payments are made.
- Cooperation and communication
Ensure that all departments work and communicate with each other. Encourage a culture of feedback and open discussion. This will ensure that any issues that need improvement are detected as soon as possible.
- Ensure customers pay on time
Projects can be in big trouble if customers pay late. It affects the cash flow of the project and leads to not having enough money to invest in projects or pay suppliers, etc. Therefore, make sure that your customers pay on time.
- Effective inventory control
Inventory control affects almost every aspect of project operations. Poor warehouse management, especially for warehousing and distribution, dramatically increases rates of inefficiencies and poor productivity.
Notes when managing small project financials
The financial management of small and medium projects is often overlooked. One reason given is that small project owners are often overwhelmed with many tasks, so they have little time to manage their finances or if they do, they do not do well. In fact, up to 80% of projects of all sizes, without good cash flow management, will fail or even go bankrupt.
Here are some basic ways to help small project owners effectively manage their finances:
- Sign up for a basic accounting class before you go into the project. The knowledge learned from that course will help you manage the project’s books, avoiding the case of being overtaken by the accountant.
- Before starting a project, it is advisable to find an accountant who is well versed in the type of project you intend to enter and regularly consult and consult with this person. That will help you know what details to look out for and what to avoid when managing your finances.
- Investing in technology is never wasted so choose the best financial management software for your project.
- When the project is just starting to operate, the financial management is not much difficult, the manager should keep track of the books and practice the accounting theories that have been learned.
- From the outset, managers should establish measures against fraud and dishonesty. These measures include the establishment of internal control and inspection policies.
- An important note is not to ignore the monthly statements from the bank. On a monthly basis, the manager should reconcile the balance of loans, deposits, and interest with that report.
- The monthly cash flow statement needs to be updated and monitored regularly and on time.
- To streamline the human resource apparatus for projects, managers can outsource services.
- Managers should build monthly financial reports to facilitate monitoring the progress of the project so that they can promptly make the necessary plans.
- Accounts used for projects should not be combined with personal accounts for cash flow transparency.
Project financials management software
Project financials management software is a collection of working processes and cash flow control in the production and project process in order to bring profits to the project.
Typically, financial management software will have the following characteristics:
- Assist in the preparation and approval of budget plans in the project.
- Allocate financial resources to activities that generate profits for the project.
- Provide reports with KPIs, thereby helping to identify and control each expense item, minimizing overspending.
- Control the actual cost of each item for each department and department, helping to end duplicate and unnecessary spending.
What are the benefits of financial management software for projects?
For large-scale projects, the financial workload is extremely large and complex, without the support of software. Here are 3 benefits that financial management software brings to projects:
- Understand the financial situation of the project: Financial management software is a tool to help summarize, store and quickly update the financial situation of the entire project. Managers will rely on the data on the software to capture the project situation, cash flow in and out of the project, thereby taking reasonable and timely adjustment measures.
- Capital management and capital use structure: From the updated data on the software, administrators will know where the current capital sources come from, how much proportion they account for to ensure financial safety for the project. Not only that, the current financial management software has the feature of announcing, making reports on the use of capital, displayed daily on the homepage to help users easily monitor and allocate appropriately.
- Improve the capacity of the financial management apparatus: Thanks to financial management software, projects can easily analyze and make financial statistics quickly, minimizing errors.
- Moreover, most project financial management software today has the ability to work online, so wherever or whenever, managers can capture the situation of the project.
Several effective project financials management software
Odoo enterprise resource planning software integrates more than 30 core modules with more than 1000 custom applications, providing effective support in project administration. Depending on the model, size, and usage needs, projects can choose for themselves the appropriate modules.
Financial Accounting – The accounting module is one of the core modules of Odoo, helping projects integrate bookkeeping with all accounting and financial management activities. Features of Odoo Accounting:
- Accounting diary
- Set up the initial accounting system
- Purchasing and Sales Accounting
- Fund transfer
- Personnel cost management
- Easily make accounting reports: balance sheet, cash cage, number of pieces, age of debt…
Sage Live is a complete financial accounting and project solution that allows users to connect CRM, accounting, and financial data in a single application. With unified data, users will save more time building reports and can spend more time on other important issues.
Accounting Seed is an accounting application, full accounting and integrated with ERP software. This software helps to track financial data through the entire project lifecycle: from marketing, to project execution, to product sales and back-office accounting, to generating the financial reports required by the client.
Project financials is considered the life source of the project, if the financial management is not effective, the project will be in danger of standing on the verge of bankruptcy. The above article has provided you with beneficial information about project financials as well as tips for effective financial management during the developing process of organizations.
Hopefully, through this article, you have grasped the concept and know how to effectively manage your company’s finances. We also hope that this information will help you have a better start to your manager career.
Practice offline & on the go with the free PMP app
Availble for iOS and Android devices
What is Project Management Triangle?
In this article, we will provide you with Project Management Triangle, each of the project triangle's elements. Let's get started!
Benefits Management and Benefits Realisation Management
If you are wondering about 'benefits management' and 'benefits realisation management'. Visit our website to learn everything!
PMP Review with A Successful Story
Let’s read PMP Review which may help you a lot! Visit our website to get more information and free PMP Practice Test!