Staying on budget is one of the core objectives for every project. Learn how to track project health by mastering the financial metrics!
Key Financial Metrics in Project Management
So, Why do financial metrics matter?
If you think that this stuff isn’t important for you because you only have internal clients (aka people who work inside your organization), think again. It’s still important that you track your costs and your budget – our two main metrics. If your team or department is over budget consistently, you may get your budget decreased or in severe cases, lose your job. We’re going to help you understand how you never have to deal with that kind of adversity.
Financial metrics also matter because you want to know exactly how profitable you actually are and how you and your team stack up next to the company KPI’s. As we’ve said in our previous video’s, you really cannot manage what you can’t measure. Being able to show and prove your results display great character and work ethic.
To add to that, when you know your costs and budget, you’re able to determine bottlenecks, cut fat and make the right moves to get your project moving in the right direction.
The first metric you should be concerned about is your budget.
In project management, a budget is an estimation of funding and expenditure over a set period of time.
A budget is always set at the beginning of the project. It encompasses time estimates and all other predicted expenses involved in getting the project going. This is the number we aim to not exceed.
How is budget calculated?
Calculating budget is not rocket science – here’s the equation.
Internal Costs + Expenses = Budget
Internal costs include things like salary and expenses would include anything extra such as hiring a contractor or buying more software licenses etc.
For example, let’s look at the budget for us to make this video. We have my salary,the salary of our camera guy and the salary of our video editor. In this case salary is calculated as an hourly rate times the number of hours each person is going to spend working on this project. Project expenses would include things things like, lighting, lavalier microphone, make-up etc. These are all things that would go into the budget.
Actual Internal Costs
Next we’ll talk about Actual Internal Costs(AIC).
AIC’s are very similar to the budget, except that they are dynamic. It starts at zero in the beginning of your project and increases as your project goes along. AIC’s should be measured often and compared against the budget so any potential risks of going overboard are mitigated before they erupt. This could happen if you made unrealistic time estimations about your project or maybe you’ve gone on a shopping spree and are spending money like it’s Christmas. If you’ve got a contractor that’s charging you an arm and a leg and it’s hurting your budget, it’s time to bring out the axe, cut the contractor and move the work back in-house. Whatever the case, you’ll be able to get a handle on everything if you keep AIC’s in mind.
So how do you make sure you’re on the right track? Simple – plug in this formula.
Budget – Internal Costs = Cost Variance
Your cost variance shows you how you stack up against your initial budget prediction.
Next, let’s take a look at project billing.
If you run a consulting or marketing agency or any business where you are billing clients, project billing represents the the amount that you charge the client.
Depending on how whether you use time & material or fixed cost billing, you might be using different methods to calculate your total billing amount:
Once you know your billing, it’s easy to calculate your profit: Billing – Internal Costs
Keeping an eye on your most important financial metrics will help you become a better and more in demand project manager. Why? Because your track record will be, as Beyonce would say, flawless.
Take the plunge and apply some of these metrics to you current projects and see how well your projects are really doing.
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