Project Toolkit

Financial Planning

Financial Planning

Complete guide to project financial planning including budgeting, cost tracking, variance analysis, and Earned Value Management.

Financial Planning

Financial planning establishes the project budget, defines how costs will be tracked, and sets up controls to manage financial performance.

Purpose

Financial planning ensures:

  • Adequate funding is secured
  • Costs are estimated accurately
  • Spending is controlled
  • Variance is identified early
  • Financial decisions are informed

Key Components

Component Description
Budget Approved funding allocation
Cost estimate Detailed breakdown of expected costs
Contingency Reserve for known risks
Management reserve Reserve for unknown risks
Cash flow Timing of expenditure
Financial controls Approval and tracking processes

Cost Categories

Category Examples
Labour Internal staff, contractors, consultants
Hardware Servers, devices, infrastructure
Software Licences, subscriptions, development
Services Training, support, hosting
Facilities Office space, equipment
Travel Site visits, meetings
Contingency Risk allowance

Budget Development Process

flowchart LR A[Estimate
Costs] --> B[Add
Contingency] B --> C[Review &
Challenge] C --> D[Seek
Approval] D --> E[Baseline
Budget] classDef blue fill:#108BB9,stroke:none,color:#fff class A,B,C,D,E blue

Estimation Approaches

Approach Description Accuracy
Analogous Based on similar past projects Low-Medium
Parametric Using cost per unit metrics Medium
Bottom-up Detailed task-level estimates High
Three-point Optimistic, likely, pessimistic Medium-High

Contingency Planning

Contingency vs Management Reserve

Contingency Management Reserve
For known risks For unknown risks
Included in baseline Outside baseline
PM can use Sponsor approval needed
Typically 10-20% Typically 5-10%

Financial Controls

Approval Thresholds

Define who can approve spending at different levels:

Amount Approver
< £5,000 Project Manager
£5,000 - £25,000 Senior Supplier
£25,000 - £100,000 Project Board
> £100,000 Programme/Portfolio

Change Control

All budget changes should follow change control:

  • Document the change request
  • Assess impact on budget
  • Obtain appropriate approval
  • Update baseline if approved

Tracking and Reporting

Track these financial metrics:

Metric Description
Budget Approved funding
Actual What’s been spent
Committed Contracted but not yet paid
Forecast Expected total at completion
Variance Difference from budget
EAC Estimate at Completion

Budget Tracking

Budget Structure

Element Description
BAC (Budget at Completion) Total approved budget
Period budget Budget allocated to each period
Cumulative budget Running total planned spend
Actual spend What has been spent
Committed Contracted but not yet invoiced
Forecast Expected remaining spend

Budget Tracking Report

Category Budget Actual Committed Available Forecast Variance
Labour £100,000 £45,000 £30,000 £25,000 £98,000 £2,000
Software £25,000 £22,000 £3,000 £0 £25,000 £0
Hardware £15,000 £14,500 £0 £500 £14,500 £500
Services £10,000 £5,000 £4,000 £1,000 £10,000 £0
Total £150,000 £86,500 £37,000 £26,500 £147,500 £2,500

Tracking Frequency

Project Size Tracking Frequency
Small (< £100k) Monthly
Medium (£100k-£500k) Fortnightly
Large (> £500k) Weekly

Variance Analysis

What is Variance?

Variance = Planned - Actual

  • Positive variance = Under budget (good)
  • Negative variance = Over budget (requires attention)

Types of Variance

Type Formula Interpretation
Cost Variance (CV) Budgeted cost - Actual cost Are we over/under budget?
Schedule Variance (SV) Earned value - Planned value Are we ahead/behind schedule?
Rate Variance (Budget rate - Actual rate) × Actual hours Are resource rates as expected?
Efficiency Variance (Budget hours - Actual hours) × Budget rate Are we working efficiently?

Variance Analysis Process

flowchart LR A[Identify
Variance] --> B[Determine
Cause] B --> C[Assess
Impact] C --> D[Plan
Response] D --> E[Implement &
Monitor] classDef blue fill:#108BB9,stroke:none,color:#fff class A,B,C,D,E blue

Common Causes of Variance

Variance Possible Causes
Labour over budget Scope creep, rework, low productivity, rate increases
Labour under budget Delayed start, fewer resources than planned
Materials over budget Price increases, additional scope, waste
Timeline variance Dependencies, blockers, estimation errors

Variance Thresholds

Threshold Action Required
< 5% Monitor
5-10% Investigate, plan correction
10-15% Escalate to sponsor
> 15% Formal exception report

Earned Value Management (EVM)

EVM Basics

Earned Value integrates scope, schedule, and cost to measure project performance.

Metric What It Measures Formula
PV (Planned Value) Budgeted cost of planned work From schedule
EV (Earned Value) Budgeted cost of completed work % Complete × BAC
AC (Actual Cost) Actual cost of completed work From accounts

Performance Indices

Index Formula Interpretation
CPI (Cost Performance Index) EV ÷ AC Cost efficiency. >1 = under budget
SPI (Schedule Performance Index) EV ÷ PV Schedule efficiency. >1 = ahead
CV (Cost Variance) EV - AC Positive = under budget
SV (Schedule Variance) EV - PV Positive = ahead of schedule

Forecasting with EVM

Metric Formula Meaning
EAC (Estimate at Completion) BAC ÷ CPI Forecasted total cost
ETC (Estimate to Complete) EAC - AC Cost to finish
VAC (Variance at Completion) BAC - EAC Expected final variance
TCPI (To-Complete Performance Index) (BAC - EV) ÷ (BAC - AC) Required future efficiency

EVM Example

Project Status at Month 3:

  • BAC (Total Budget): £100,000
  • PV (Planned to date): £40,000
  • EV (Work completed): £35,000
  • AC (Actually spent): £42,000

Calculations:

  • CV = £35,000 - £42,000 = -£7,000 (over budget)
  • SV = £35,000 - £40,000 = -£5,000 (behind schedule)
  • CPI = £35,000 ÷ £42,000 = 0.83 (83p value per £1 spent)
  • SPI = £35,000 ÷ £40,000 = 0.875 (87.5% of planned progress)
  • EAC = £100,000 ÷ 0.83 = £120,482 (forecasted total cost)

Interpretation: Project is over budget and behind schedule. At current performance, it will cost £120,482 to complete - £20,482 over budget.

EVM Status Interpretation

CPI SPI Status
> 1 > 1 Under budget, ahead of schedule
> 1 < 1 Under budget, behind schedule
< 1 > 1 Over budget, ahead of schedule
< 1 < 1 Over budget, behind schedule

Financial Reporting

Monthly Finance Report Contents

Section Content
Executive summary Overall status, key variances
Budget vs actual By category, cumulative
Variance analysis Explanations for significant variances
Forecast Expected final cost
Cash flow Spend profile
Risks Financial risks and mitigation
Recommendations Actions required

Financial Dashboard Metrics

Metric Visual
Budget health RAG status
Spend vs plan Line chart (cumulative)
Category breakdown Pie chart
Variance trend Bar chart by period
CPI/SPI Gauge charts
Forecast vs budget Comparison bar

Cash Flow Management

Cash Flow Planning

Element Consideration
Timing When will costs be incurred?
Payment terms When will invoices be paid?
Funding releases When will budget be available?
Seasonal factors Holiday periods, year-end

Cash Flow Forecast

Month Planned Actual Cumulative Plan Cumulative Actual
Jan £10,000 £8,000 £10,000 £8,000
Feb £15,000 £17,000 £25,000 £25,000
Mar £20,000 £18,000 £45,000 £43,000
Apr £25,000 - £70,000 -

Common Pitfalls

Pitfall Mitigation
Underestimating effort Use historical data, add contingency
Forgetting cost categories Use checklist of cost types
No contingency Always include risk allowance
Infrequent tracking Monitor costs weekly/fortnightly
Scope creep Strong change control
Last updated: 13 January 2026
Themes

Planning

Financial