Issue #22 - Project Finance Metrics
10 Project Finance Metrics which will help you make decisions.
Read time: 3 minutes
✍️ Quote of the Week
🔨 10 Project Finance Metrics which will help you make decisions.
🌟 Bonus material: Fallback (plan) vs Workaround
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✍️ Quote of the Week
“Most events in life can be categorized in one of two ways: a good time, or a good story."
🔨 10 Project Finance Metrics which will help you make decisions.
Managing a project’s financial aspects including its cost, revenue, and profit is not easy.
Project financials aims to keep projects within set budgets. In doing so, financial management for projects on an individual level not only helps you organize and manage projects better but also positively impacts business growth.
This happens because project financial management helps to balance:
Investment in a project and the expected returns from it
The potential impact of an ongoing project on other projects in the pipeline
The overall impact on your agency
Let’s break down all these to the 10 most important project finance metrics
10 Project Finance Metrics which will help you make decisions.
Budgeting and forecasting are crutual part for all projects.
Return on Investment - ROI A calculation of the monetary value of an investment versus its cost. The ROI formula is: (profit minus cost) / cost
Payback Period "Sooner the better". the length of time it takes to recover the cost of an investment or the length of time an investor needs to reach a breakeven point.
Net Present Value - NPV Used to determine whether the anticipated financial gains of a project will outweigh the present-day investment.
Internal Rate of Return - IRR Is the discount rate that makes the net present value (NPV) of a project zero.
Cost Performance Index - CPI CPI = earned value (EV) / actual cost (AC). A CPI ratio with a value higher than 1 indicates that a project is performing well. If is less then 1 project is behind.
Schedule Performance Index - SPI Measure of the conformance of actual progress (earned value) to the planned progress: SPI = EV / PV. In both of the above formulas, a value of 1.0 indicates that the project performance is on target.
Cost Variance - CV The difference between project costs estimated during the planning phase and the actual costs. In other words, it is how much actual costs vary from budgeted costs. To see if a project is under or over budget.
Estimate at Completion - EAC The current expectation of the total costs of a project once completed. The calculation is the sum of the amount invested at the time of measurement and the costs necessary to complete the work.
Estimate to Complete - ETC The financial performance index and project management measure that shows you the remaining cost you expect to pay in order to complete a project.
Budget at Completion - BAC Measure that is often used in earned value management to track the actual cost of a project against its forecasted budget. It is calculated at the start of a project based on the project work and its individual components.
Read more here: LinkedIn Post Discussion
What are the benefits of cost management in project management?
Project managers should not underestimate the business advantages of effective cost management. Here are three of the key benefits:
Prevents overruns: By allotting costs in the early planning stages, project managers ensure they don’t overspend on specific areas.
Avoids risk: A good budget will have a risk allowance to ensure project success is not compromised if unforeseen costs arise.
Aids future planning: Cost reports can help with resource optimization. This can lead to more accurate budgets in the future.
🌟 Bonus material: Fallback (plan) vs Workaround
In project management, once the original plan does not proceed as expected or there are any changes in the external environments, the Project Management will need to investigate whether changes to the original plan is needed. This is where Fallback and Workaround would need to be implemented.
Fallback: a fallback plan is a plan developed to deal with risks that have been identified during project planning
▪ for identified risks
▪ known unknowns
Workaround: a workaround is the unplanned response the Project Manager need to take to deal with emerging risks and risks that are passively accepted as the risk response during project execution
▪ for unidentified risks or risks that are passively accepted
▪ unknown unknowns
Conclusion
▪ Fallback is pre-developed risk response strategies for identified risks in order to protect the original project plan (the costs deal with identified risks are included in the contingency reserve)
▪ Workaround is immediate risk response strategies for unidentified risks (or identified risks that have been accepted passively) in order to contain the damages to the project plan (the costs deal with unidentified risks can be obtained from the management reserve upon management approval)
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