Let me call out a few project finance terminologies at you:
- Earned Value (EV),
- Net Present Value (NPV),
- Internal Rate of Return (or Return on Investment (ROI)) and
- Present Value Index
What all these terminologies have in common is that they attempt to measure, explain and quantify the discounted cash flow frameworks. A very fancy way of saying ‘success measured in dollar terms’.
And at the corporate accounting level, where the balance and profit & loss ledgers are managed, these are very real, important and implicitly linked to an organisation’s share price, board of directors and chief executives. But when it comes to project finance management achieving any resembles to the frameworks mentioned above, it’s often non-existent for many organisations who are standing up projects every day.
Although, if you follow a few simple steps, it may be possible to move towards something that firstly gives you a straightforward way of tracking a project’s finance journey (lifecycle). Which at the end of the day, may not be a true ROI or NPV but will be understood by an investment committee, heads of departments, general managers and project managers. This is especially important for PMOs who can help drive significant value with this information and mitigate risks around budgets.
Within our experience working with several Tier 1 and Tier 2 organisations, across a number of industries, through trial and error. These are the foundation principles for success in project finance management:
Start with a good foundation. Then everything can be rolled up into one single slide for presentation purposes, no more than 20-30 words as foot notes. Resort to simple tables that are sensibly laid out. This may require circulating draft proposals with key stakeholders including your organisation’s corporate finance group/department.
Audience is king…
Be prepared to run three, four or ten version of your Clean Summary. Some of your audience will be interested in your Opex/Capex split, have a version for that, others may be interested in your Lifecycle phases, others in your Labour verses Non-Labour split. And so on.
Capture information from any system you can. Capture resources actual data from HR systems, CRM systems, wherever you can get it from. Capture your purchases from your procurement systems, invoicing systems, contracts finance schedules, again from as many sources as possible.
Once you have a rhythm and systematic process of regularly extracting information, cross check it. This will help firm up your financial position and your understanding of the financial landscape in your organisation.
Treat the finances you manage like your own. Imagine it was your money being spent. If you were building a house with a limited budget and need to get the family moved in before Christmas, how would you manage those financials?
In conclusion, to underpin the points glossed over above may take an entire team of specialist project, finance and PMO support staff to carry out all the finite tasks, but these foundation principles will dramatically shift the compass for how your financial success can be tracked and measured.
By no means is this the complete picture, but by laying out this foundation, it will enable the introduction of capabilities to carry out the holy grail of analysis like Earned Value and Return on Investment.
How well does your finance data roll up today? Can you drill down to the transaction level? Can you trace the procurement steps of that transaction?
Does your PMO help you to seamlessly manage your Portfolio / Program financials?
Interested in learning more about Agile Management Office and the AMO way of doing things? Contact us via one of our many options listed on our website HERE.