Financial Management

Financial Management Practice determines how the finances are managed across the portfolio. This practice does not concern finances of individual projects and programmes, but the portfolio as a whole.

This practice is part of the Portfolio Delivery Cycle.

Purpose

An organization’s finances remain the topmost indicator of how it performs. This is true, even for non-profit entities, because their continuity is dictated by how well they manage their funds. Therefore, it is very important to align the portfolio management with the financial management processes of the organization.

Implementing

The following activities form the portfolio financial management practice:

• Choosing the right metrics:
  • Financial performance is almost always assessed through metrics. Net Present Value (NPV), IRR (Internal Rate of Return) and Break-even Point are some of the metrics that are commonly used for assessing investment decisions. These metrics can be applied to most portfolios. The finance team and the senior leadership would be best poised to choose the metrics are best suited for the organization’s business model.
• Staged Release of Funds:
  • Funds are rarely released upfront to a project. In nearly all cases, funds get released stage by stage, as the project or programme progresses. The obvious reason is the fact that any organization works with a limited budget and there are always other investments and expenses that require funding. Therefore, a financial plan for the entire portfolio is also a necessity.
• Financial Contingency and Monitoring:
  • An organization would also have a financial contingency plan. The financial contingency plan is created to mitigate the impact of an unforeseen risk. There should also be a contingency plan at portfolio level, to address project, programme and portfolio-level contingencies. The reason is simple. Not meeting portfolio aims will have a serious impact on meeting the organization’s strategy and the portfolio-level financial contingency plan can also be aligned with the project-level and programme level contingency plans.
  • All organizations monitor the amount of money they spend for their activities. Monitoring spend at portfolio-level is equally important, as it will give a good indication on the costs that are incurred for reaching the organization’s strategic goals. The same dashboard can be trickled down to programme and project-levels.

Keys to Success

Net present value is a financial indicator that expresses the value of future costs and benefits in today’s money. This is due to the fact that value of money depreciates with time. Many organizations use Net Present Value when calculating financial benefits.

Staged release of funding should be aligned with milestones and gates of the project. This will ensure funds are best utilized.

Written by Inham Hassen

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