Which Financial Metric is right for your project?

While evaluating initiatives/projects, it is important to evaluate the financial impact of the investment. There are numerous financial metrics out there. Here are some of the common ones used. It is recommended to take into account the time value of money metrics.

ROI (Return on investment) – While comparing two or more investments using this method, consider the risk. The higher the risk the higher the expected return. Benefits can come from reduction of costs, increase in profits or additional value.
Calculation: (Total cost of the investment – Total benefits) / Total cost of investment
Note – Its use is limited. It ignores the time value of money.

Payback Period – How long will it take for an investment to pay for itself?
Calculation: Total amount of investment/annual savings expected
Note – Its use is limited. It ignores the time value of money.

Break Even Analysis – How many units one needs to sell in order to break even with the fixed cost cash investment?
Calculation: Breakeven volume = Fixed Cost/Unit Contribution Margin
Unit Contribution Margin = Net unit revenue – variable costs per unit
Note – Its use is limited. It ignores the time value of money.

Economic value added – It is used to evaluate investments and operational business performance.
Calculation: Net Operating Profits after Taxes – (Capital Used x Cost of Capital)
Note – It analyzes the cost of capital in investment decisions.

NPV (Net Present Value) – It is the value today of a future stream of cash flows discounted at some annual compound interest rate (or discount rate). It is a more sound decision making tool as long as the assumptions utilized in the analysis are relevant.
Note – Use a financial calculator. NPV is a more accurate value of an investment opportunity. It takes into consideration the time value of money.

IRR (Internal Rate of Return) – It is the discount rate at which the NPV of an investment equals zero. If the IRR is greater than the opportunity cost of capital required the investment is a good one. The opportunity cost is the expected return on a comparable investment. Again, assumptions used in the analysis should be pertinent.
Note –This method is preferred as it takes into account the time value of money.

Reading Reference: Finance for Managers – Harvard Business Essentials
Financial Intelligence by Karen Berman and Joe Knight, Harvard Business School Press

10 Critical Success Factors for Programs/Projects

Majority of programs/projects don’t meet the expectations of the business case/plan or the expectations of the Project Sponsors. Why is that? Here are the top 10 reasons. Pay close attention to these and your chances of success will go up.

1. Planning – Invest the time to plan the project charter, statement of work, business case, and stakeholder management strategy.
2. Budgeting and Cost Management – Ensure that the organization has the ability to provide the required resources (people and money) for the objectives stated in the project charter. Financial oversight for the duration of the project is key to ensure resources are available as planned and needed.
3. Team skills and HR Management – Partnership with HR is required to ensure the planning and availability of the right skills for the initiative.
4. Sponsor/stakeholder alignment and engagement – Executive sponsorship and engagement enables the focus of the organization on the initiative and helps to remove barriers.
5. Change Management – For the success of a project, this is key and is often overlooked due to the lack of time or resources. A comprehensive communications/training strategy, plan and execution is critical to ensure that those impacted have bought in for adoption.
6. Time Management/Project tracking – Phases in the project lifecycle have their own schedule managed and reported by the leader to a central PMO (for large programs) who monitors the end to end view of the initiative. This ensures all dependencies are adequately planned with no disruptions to the schedule.
7. Quality Management – This is applicable for every stage of the project and deliverable. Ensure there is close attention to quality that meets expectations.
8. Scope Management – During the project, new or changes to requirements that were originally overlooked tend to be raised. Manage them with a Change Control Board or an equivalent governance structure such that it does not derail the focus and momentum of the initiative.
9. Risk Management – Ensure that risks are raised and mitigated during the lifecycle. Depending on the severity and impact, they should be raised to the Sponsors/Steering Committee.
10. Monitoring and control – A PMO or project manager facilitates governance and control during the lifecycle for all deliverables and schedules.

Reading Reference : A Guide to Project Management Body of Knowledge (PMI Institute)