What is Financial Planning

Almost everything we do in life costs money, and so do projects. Project planning may take months, but implementing a project plan could take even years. Financial planning the estimate of all future costs for completing the project. It assures that there will sufficient funds for all expenses, wages, and any other incurred expenses during a project life cycle. A WBS will break down the work required an cost estimate to complete each step assists it creating a successful financial plan. A finical plan should be constructed as early as possible in the project.

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Purpose of Financial Planing

One of the main elements of success for managing projects is a successful financial plan. Projects depend on many variables for success; however, the financial aspect of the project concludes whether the project will go on or not. If project managers fail in creating a successful financial forecast, the project team could run out of funds and the project would hit a brick wall or will be put on hold until approval for new funding is received. Putting a project on hold also costs time and money!
A financial plan is a detailed document of the total cost estimate of the project plan. The Financial plan includes detailed description of why and how everything will be estimated. It includes pricing such as labour, material, rentals and so much more. Annual updates would allow the project leader and team monitor their current cost in accordance to the budgeted cost up to date. If there were a variance, the financial statement would forecast how much more funding is required to complete the project.

Financial Plan

A financial plan includes:

- A description of costs undertaken in each step of the project.
- A dated schedule indicating when each expense will be incurred.
- A sum of the total cost of the project and the cost of each step along the project.

A financial plan depends on the project plan's requirements. The financial plan cannot be created until:

- A detailed description of the types of costs to be incurred during the project life cycle.
- Identification of the cost per unit for each type of activity.
- The creation of a Cost Schedule identifying the costs incurred along the project.

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Financial Metrics in Projects

There are many ratios that would indicate to project managers whether the financing forecast for the project is on schedule or not. Managers will look at many ratios such as the ROI, Cost Performance Index (CPI), and the Schedule Performance Index (SPI). The CPI tells you how actual project expenditures relate to the original project budget. SPI tells you whether progress on the project's many activities is ahead or behind the project plan. Both SPI and CPI tell you whether you have spent more or less than the original project plan allowed, and for the amount that you have spent so far, how far you have progressed in the project schedule.
A good project plan will be on budget with little variance. If the project is behind schedule, a financial plan would allow the project team in making a decision whether or not there are any extra sufficient funds to use in hiring more people to speed up the process. If not, the project team with the sponsors should take a look at the financial plan and see if any adjustment could be made such as acquire more funding to meet the deadline. A project not finishing on time would cost more money than to actually acquire the extra funding while the project is still in progress.