Project Financial Management: 6 Tips to Increase Your Professional Services Firm Profitability

Project financial management, also known as project accounting, involves overseeing a project's financial aspects, including cost, revenue, and profit. It is a critical component of project success since it helps to ensure that a project remains on budget and achieves its goals.

Managing project finances involves coordinating planning, estimating, budgeting, funding and managing project expenses and billing. Project managers are responsible for managing the budget throughout the project lifecycle.

Robust project financial management is crucial for professional services firms that want to ensure positive outcomes for their clients. By monitoring project finances closely, you will have a complete picture of project costs, including planned and actual expenses. This knowledge supports data-driven decision-making and enables project managers to implement best practices, such as resource reallocation and budget revisions, to keep projects on track.

Benefits of Robust Project Financial Management

Implementing project financial management and accounting processes offers several benefits for professional services firms, from keeping your projects on track to improving how you manage your resources.

1. Keep Your Projects on Track

For project managers, the main objective is to ensure that projects are completed within the defined scope, timeline, and budget. Therefore, having robust financial management processes in place means that managers can allocate funds and resources appropriately, monitor project costs, and make necessary budget revisions when needed. Real-time financial reporting offers a complete financial picture, enabling managers to make informed decisions and mitigate financial risks.

With financial planning and controls in place, you can ensure that projects meet revenue targets while minimizing fiduciary risk and potential impact on the bottom line. Also, the ability to provide accurate and transparent financial reports to clients builds trust and strengthens your firm's reputation.

2. Identify and Prioritize Profitable Projects

A clear understanding of the financial performance of past, current and future projects will allow your professional services firm to identify and prioritize client work that will deliver the highest return on investment (ROI). By investing in projects that have the potential to generate significant revenue and profit, you can align the organization's financial planning with its growth objectives and save time and resources on projects that may yield little returns.

3. Improve Your Resource Management Capabilities

Implementing project financial management processes also helps professional services firms to improve their resource management capabilities. By effectively tracking and controlling project costs, you can ensure that resources are allocated efficiently, avoiding over or underutilization, and making sure that projects remain within budget.

Challenges and Pitfalls Professional Services Firms Face When Managing Project Financials

We’ve established that effective project financial management is vital for professional services firms and their project managers when it comes to delivering positive project outcomes. However, there are several potential challenges and pitfalls that you need to be aware of.

1. Monitoring the Wrong KPIs

Tracking the wrong key performance indicators (KPIs) can cause some issues when it comes to monitoring the success of your projects.

Firstly, it can lead to a waste of resources, both in terms of time and money. If you focus on tracking metrics that do not align with the project's goals and objectives, they may divert limited resources towards areas that do not contribute to the project's success.

Secondly, monitoring irrelevant metrics can hinder decision-making. By tracking metrics that have little impact on the project's financial performance and outcomes, you may not have access to the right information to make informed decisions — leading to missed opportunities for cost optimization, resource allocation, and risk mitigation.

Finally, monitoring unimportant project metrics can dilute the focus of project teams. When teams are bombarded with a plethora of metrics, many of which are irrelevant to their work, it can be challenging for them to prioritize their efforts and align with the project's financial objectives. This can hinder collaboration and undermine overall project performance.

2. Incorrectly Tracking Project Financials

Incorrectly tracking project financials can result in inaccurate cost projections, compromised financial reporting, budget revisions, scope creep, and hindered decision-making.

Accurate financial reporting is crucial for management and stakeholders to understand the project's financial health. With full visibility of financial data, it becomes easier to evaluate a project's progress, resource requirements, revenue targets, and profit margins.

3. Lack of Data Consistency

Project managers often find it challenging to calculate project costs, revenue, and profit due to the use of various formulas. This inconsistency results in variations in the final numbers, causing managers to seek an understanding of the accumulated costs and lack of profit. To avoid this issue, it is essential that your firm is aligned when it comes to the measurement of project data.

To ensure clarity and efficiency, establish a set of rules and formulas for all calculations. One approach is to utilize a tool, such as a project-based ERP solution, that can automate these calculations for you.

How to Improve the Financial Management of Your Projects

Now that we have covered why managing your project financials is essential and some of the challenges involved, we can look at some steps you can take to improve the financial management of your projects.

1. Start Tracking the Right Financial KPIs

When measuring project KPIs, one of the first steps is tracking the right financial metrics. If you track the right metrics, you will have a complete picture of a project's financial health and make well-informed decisions throughout the project lifecycle.

Some critical financial metrics include project costs, revenue targets, profit margins, and actual costs. By monitoring these metrics, you can assess if the project is on track to meet its financial goals and make necessary adjustments if needed.

To effectively track these metrics, project managers can leverage financial management tools and software. These tools provide real-time data and reporting capabilities, allowing for better financial analysis and decision-making.

2. Introduce Project Accounting Software

Professional services firms must introduce project accounting software for effective project financial management. With multiple projects running simultaneously, it becomes crucial to have a centralized system that can track project budgets, costs, and financial resources in real-time. Something that most standard accounting systems are not set up to do.

Project accounting software gives you a complete picture by capturing actual costs, revenue targets, and profit margins for each project. Through accurate financial reporting, you can identify any deviations from the project budget and make necessary revisions to ensure that projects stay on track.

3. Set a Cost Baseline

A cost baseline is a budgetary snapshot that serves as a reference point for monitoring and controlling project costs throughout its lifecycle.

By setting a cost baseline at the outset of a project, you establish a foundation for financial planning and decision-making. The cost baseline provides a benchmark against which actual costs can be compared, allowing for early detection of deviations from the planned budget and enabling proactive measures to mitigate any potential overruns or underspending.

4. Focus on Project Profitability

An important consideration in project financial management is the project margin, which determines the project's profitability.

By focusing on project margin, you can ensure that you are making informed financial decisions and maximizing profits. You can also pursue and prioritize projects with a higher potential for generating revenue and supporting the organization's financial objectives.

5. Track Project Expenses Accurately

Effective expense tracking is essential for monitoring and controlling your project budgets. It helps keep expenditures within the allocated amount, preventing cost overruns, and ultimately ensures that projects are completed within budget. Additionally, this assists with financial planning and reporting.

6. Have a Plan in Place for Changes in Project Scope

Change is inevitable in any project, whether it be modifications to the project plan, unforeseen issues, or evolving client requirements. Without a proper change control process in place, these changes can have a significant impact on a project's financial resources, costs and, ultimately, its success.

By implementing a change control process, you can evaluate the potential impact of proposed changes, assess the financial implications, and decide whether to approve or reject them. This process helps to ensure that changes are aligned with the project's objectives, budget, and timeline. It also provides a mechanism to track and document changes, making financial reporting and analysis more accurate and transparent.

Ready to Level Up Your Project Financial Management?

Robust project financial management is essential for professional services firms to control project costs, manage risks, ensure project progress, and establish trust and accountability with clients. It is a crucial component of successful project management and contributes to the overall success of the firm.

Deltek's project-based ERP solutions are designed to support professional services firms in managing their project finances. Providing them with the insights and controls they need to deliver successful and profitable projects.