Project managers use tools to analyze forecasts, budgets, income statements and other financial documents. To maximize the profitability and return on investment for projects, a project manager requires a working knowledge of basic finance and accounting concepts. Using tools such as spreadsheets and online calculators, project managers analyze the project’s financial information, apply accounting principles and manage reports to ensure a project runs smoothly.
Cost Benefit Analysis
Project managers perform a cost benefit analysis when they need to make a project decision. Typically using a spreadsheet tool such as Microsoft Excel, Google Spreadsheets or Quickbooks, they analyze the costs associated with a given investment calculated over a three-year period to generate a net present value, payback and other metrics needed to make a good financial decision. For example, a cost benefit analysis for a training development project usually involves measuring the cost of creating the training materials and subtracting savings generated by personnel operating more efficiently. More complex cost benefit analyses involve multiple costs and numerous benefits.
Cash flow forecasts help project managers predict whether income will cover the cost of operations. Project managers can download a template from a website, such as the Microsoft Office Templates website, or develop their own format. Then by entering income expected and expenses for each month and comparing the values using formulas, the project manager can prepare a statement to show optimistic or pessimistic cash flow outlook scenarios. Typically a forecast covers one to two years. Cash flow forecasts provide a way for project managers to determine if an activity is a viable option.
Project managers complete a break-even analysis to determine the level of output at which the money generated by the product or service produced by the project equals the cost of developing it. For example, project managers use free online tools, such as the Project.net software, to maintain a project dashboard and ensure that projects tasks produce output that helps manage projects.
Project managers use budget tracking software, such as Clarizen software, to determine if project investments make sense over time, after comparing the monetary value both today and in the future. Software tools allow project managers to define hourly rates for resources, customize billing rates and analyze resource usage. These tools and techniques help keep the project on track by ensuring expenditures, such as specialized consulting, software licenses and hardware costs, are allowed within the allotted funding.
- MindTools: Decision Making Techniques
- "Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability”; Kevin R. Callahan, Gary S. Stetz, Lynn M. Brooks; 2007
Tara Duggan is a Project Management Professional (PMP) specializing in knowledge management and instructional design. For over 25 years she has developed quality training materials for a variety of products and services supporting such companies as Digital Equipment Corporation, Compaq and HP. Her freelance work is published on various websites.