Financial Decisions for Project Managers, Module Two


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Making the financial decision to do a project is a key skill for managers and it should be for project managers too. Now learn more about the key elements of financial decision making. To learn more or request a copy of the presentation, contact me at

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  • Instructor Note: Review contents of slide with participants. Remind them this is a two day course intended to help them become more faimiliar with principles of business financial management in day one and then in day two we turn our attention to developing project budgets and managing the costs of a project. Day One is important for two reasons, which will be explained further as you get into the course materials. But in summary, a sound understanding of business financial management will help them be more effective project managers, as they focus on the revenue generation needed to make your company successful and as they better understand a client ’s financial records, they can focus on proposals that have the most impact for the client’s reveunes as well.
  • ----- Meeting Notes (3/7/11 15:47) ----- Review Module objectives Elapsed Time: 2 minutes
  • ----- Meeting Notes (3/7/11 15:47) ----- This is an overview of the module contents, a six step process for making a finanical decision about going forward with a project. Our clients will do many of the same steps to see if this project is worth the investment of their capital dollars. If you follow this process, you will be more successful at submitting and winning proposals for work from you clients. Elapsed time: 3- 5 minutes.
  • ----- Meeting Notes (3/7/11 15:47) ----- The first step in the proposal process to gather as much data as possible about the project or proposal idea. Review the contents of the slide with participants. and discuss the need to understand as much about a project/proposal as possible. Elapsed time: 5-7 minutes.
  • ----- Meeting Notes (3/7/11 15:47) ----- If your proposal is for a new initiative or with a new client you also need to define skills sets, deliverables, and the approach for responding to this new opportunity. If with an exisiting customer, you may have much of this information. Elapsed Time: 7-10 minutes.
  • ----- Meeting Notes (3/7/11 15:47) ----- survey the participants to see how many in the class have completed PIP worksheets. Share a completed worksheet with the participants and go over some of the details on how to complete Elapses Time: 10-15 minutes (depending on the PIP Demo)
  • ----- Meeting Notes (3/7/11 15:47) ----- Briefly review the need to consider an capital investments from the UST Global side for hardware, software, equipment and how this might be charged to the customer and back to the account if not the customer. There is a cost of capital and it is determined by adding up all of the expense for any thing other than labor. Elapsed time: 15-17 minutes.
  • Cash flow is the key element to determine if a business is able to stay afloat, turn a profit and continue to make money for it ’ s shareholders and investors. Take a look at cash flow, as what goes into and out of your business. Positive cash flow is the measure of cash coming in (sales, earned interest, stock issues, and so on), whereas negative cash flow is the measure of cash going out (purchases, wages, taxes, and so on). Net cash flow is the difference between your positive cash flow and your negative cash flow, and answers that most fundamental of business questions: How much money is left in the till? To grow your business, you need to make key decisions about where to invest your money over the long term. ----- Meeting Notes (3/7/11 16:02) ----- Elapsed Time: 17 - 20 minutes
  • NPV returns the net value of the cash flows   - represented in today's dollars. Because of the time value of money, receiving a dollar today is worth more than receiving a dollar tomorrow. NPV calculates that present value for each of the series of cash flows and adds them together to get the net present value. IRR is based on NPV. You can think of it as a special case of NPV, where the rate of return calculated is the interest rate corresponding to a 0 (zero) net present value. Managers like IRR because in theory, it gives them an idea of how much return they ’ ll be getting on a project. If IRR is higher than the discount rate used in the NPV calculation (which in companies is usually a fixed figure dictated by Treasury or some other internal group), then the project obviously is worth investing in. You can see yourself how IRR is appealing. Suppose I told you I have an investment whose NPV is $15,682. Should you invest? How about if I told you the IRR (or rate of return) on the investment is 15%? Then you could easily compare it to what you might get from a savings account, CDs, or stocks. Intuitively it makes more sense, because we are used to comparing investments using percentage rates. IRR has serious flaws: Any time a project is forecasted to have negative cash outflows after having cash inflows, IRR is probably not the best method to use. Let ’ s say I told you I had a project with an IRR of 50%. Would you be interested in it? On the surface, a rate of 50% sounds pretty good. But the following two examples both give an IRR of 50%, and as an investor, you are clearly be more interested in one than the other: Opportunity 1: You put $1,000 into the project in Year 1, and in Year 2, you get $1,500 in return. IRR = 50%, NPV = $360 @ 8% discount rate. 
 Opportunity 2: You get $1,000 in year 1, and in Year 2, you put in $1,500 into the project. IRR = 50%, NPV = -$360 @ 8% discount rate. Here, IRR doesn ’ t give an unambiguous answer, but NPV does. Using NPV, you would reject Opportunity 2. Imagine if the situation were more complicated, and you received money in some periods and had to outlay money in others. IRR won ’ t give you the right answer in these situations, but NPV will. Similarly, you can have a situation where NPV = 0 at two different IRRs. This can happen when you have a large initial investment (outflow), followed by a series of returns (inflows), followed by another outflow of money. In these situations, NPV isn ’ t constantly increasing or decreasing with discount rates. Yet using NPV instead of IRR will give you the right answer in each case. 4) When two projects are mutually exclusive, IRR may give the wrong answer. Let ’ s say you have a situation where you need to upgrade a machine. You could either invest $10,000 up front and get a benefit of $25,000 the next year through an upgrade, or you could invest $25,000 up front to buy a new machine that will give you benefits of $50,000 the next year. Which would you choose? If you use IRR, you ’ ll find that the first option gives an IRR of 150%, and the second 100%. Using NPV and an 8% discount rate, you ’ ll find the first situation is worth $12,174 and the second, $19,719. In reality, you ’ ll be richer in the second scenario. Think of it this way. I am feeling awfully generous and let you choose one of two options. Option 1: if you give me $0.25, I would be willing to pay you a dollar. That ’ s a 300% return. Not bad. Or you can give me $100, and I will give you $300. Which would you choose, assuming you could find $100 to use for the transaction? Sure, your return would be worse in the second situation at 200%, but wouldn ’ t you rather get $300 for $100 instead of $1 for $0.25? ----- Meeting Notes (3/7/11 16:02) ----- Take about 10 mintues to discuss NPV and IRR. Use the instructor notes, or make up your own examples. Provide students with handout on NPV and IRR. Elapsed time: 25-30 minutes.
  • n discounted cash flow analysis, we use the cost of capital to discount the value of cash flows in the future to their present values. Adding the present values of all cash flows in a project, we can calculate the project ’ s total value: its net present value (NPV). Projects with a positive NPV have a return that exceeds the cost of capital so if the project ’ s NPV is greater than $0, we do it. We can also think of the analysis like this: given a set of cash flows, at what rate of return do they give us a net present value of exactly $0? Is that rate higher than the cost of capital? Let ’ s look at a simple example: a simple project that costs $100 this year and returns $120 next year. If we use a 20% rate to discount the value of the future cash flow of $120, then its present value will be $100. That present value exactly balances the $100 initial investment: the project ’ s net present value would be exactly $0 .We call this rate - the rate required to hit an NPV of $0 the internal rate of return (IRR). How is this useful, you might ask? By comparing it to the company ’ s cost of capital, you can determine the project ’ s attractiveness: if the IRR exceeds the cost of capital, it ’ s an attractive project. If our cost of capital in this hypothetical case were 10% or any value less than 20% the project would be a gooproject because its IRR of 20% exceeds that cost of capital. NPV and IRR are really just two sides of the same coin: You can use a cash flow analysis to determine either one, It ’ s a matter of deciding for which variable you wish to solve. All projects with positive NPVs have IRRs higher than the cost of capital, and vice versa. All projects with negative NPVs have IRRs lower than the cost of capital, and vice versa. IRR has some limitations as a decision-making tool. Most importantly, it can lead to misleading results because it ignores the size of the project. A $10 project can have a 50% IRR. That ’ s nice, of course, but we shouldn ’ t choose it over a million dollar project with an IRR of 20%. In spite of IRR ’ s problems, some executives prefer to speak in terms of IRR. IRR is given as a percentage, and the investing world likes percentages. The performance of stocks, bonds, ands other investments is reported in rates of return so they can be compared easily. IRR allows us to make quick comparisons not only with the cost of capital, but with the financial investments that are reported on the daily news. ----- Meeting Notes (3/7/11 16:02) ----- Walk the participants thru the two practice exercises on PV Elapsed time: 30-35 minutes
  • ----- Meeting Notes (3/7/11 16:02) ----- Point out how NPV and IRR are just a set of numbers that helps in making a comparision between two projects. If you include in your analysis and presentation to clients NPV and IRR numbers it demonstates you have a solid understanding of the client's business. Elapsed Time: 35 -40 mintues.
  • ----- Meeting Notes (3/7/11 16:02) ----- Point out that for UST Global, the PIP worksheets are how we make a financial decision to move forward with a project. Elapses time: 41-43 minutes.
  • ----- Meeting Notes (3/7/11 16:02) ----- Review how the presentation of a proposal to our internal management would include: Completed PIP worksheet, project proposal, and/or Statement of Work. Elapsed time: 43 -45 minutes
  • ----- Meeting Notes (3/7/11 16:02) ----- Proposals to clients are going to vary based on how they are created. informal discussions over lunch can often lead to unsolicited proposals. Formal proposals will normally have a set of instructions. Review key points on the slide Elapsed time: 46-50 minutes.
  • ----- Meeting Notes (3/7/11 16:02) ----- Ask participants if they have any questions and address them as they occur. Elapses time: Generally 1 or 2 minutes - 52 -54 minutes.
  • ----- Meeting Notes (3/7/11 16:02) ----- Review all of the key learnings for this module. Elapsed time: 55 -57 minutes.
  • ----- Meeting Notes (3/7/11 16:02) ----- Ask the participants to complete the post workshop action plan with any key learnings or action items they cah apply back on the job.
  • Financial Decisions for Project Managers, Module Two

    1. 1. Financial Decision Making For Project Managers Module 2 Saunders Learning Group Andover, KS
    2. 2. Workshop Map FinancialManagement Course Financial Overview Decision Making on Projects Project Budgeting Actual Costs & Variance Analysis Reviewing Financial Data Summary And Wrap-up Floyd Saunders, Andover, KS 2
    3. 3. Module Objectives Identify key elements used in project selection decision criteria Calculate Net Present Value for a project investment Calculate Internal Rate of return Calculate Economic value added Evaluate capital requirements for a project Complete the project decision making process Summarize Key Points Floyd Saunders, Andover, KS 3
    4. 4. Financial Decision Making ProcessFloyd Saunders, Andover, KS 4 Confidential and Proprietary
    5. 5. Data Collection  What’s needed to estimate financials for aData project? Scope Document Business/functional requirements Product Design At least a Rough Order of Magnitude (ROM) estimate of work effort  KLOC  Function Points  Detailed estimate from WBS Detailed requirements – Project task plan or timeline Type of technology Experience level of resources  Risks Plan Floyd Saunders, Andover, KS
    6. 6. Data for New Initiatives New Initiatives /Business Development New Initiatives /Business DevelopmentData 1. Define skills sets needed 1. Define skills sets needed {raise any Resource Requests (RRs ))with our RMG group {raise any Resource Requests (RRs with our RMG group for hire or allocation} for hire or allocation} 2. Define task list {from RFP + plus any additions we see 2. Define task list {from RFP + plus any additions we see which bring value or are required to succeed} which bring value or are required to succeed} 3. Define Deliverables {match to client SDLC terminology} 3. Define Deliverables {match to client SDLC terminology} 4. Determine approach {in terms of Staffing /sub- 4. Determine approach {in terms of Staffing /sub- contracting, travel, training, and gaps.} contracting, travel, training, and gaps.} Floyd Saunders, Andover, KS
    7. 7. Cost Worksheet 1. Every organization or company will have specificCost budget requirements for what to include in a cost worksheet. 2. Generally you need to account for: a. Labor costs b. materials used for the project c. overhead charges 3. See the example on the next page. Floyd Saunders, Andover, KS
    8. 8. Project Cost Spreadsheet ExampleFloyd Saunders, Andover, KS 8
    9. 9. Determine the investment  Does project need to purchase any?Invest  Hardware  Software  Equipment  Resources  from existing talent pool, bring onshore, hire contractors?  Visas, travel, temporary housing, transfer fees  Payment terms  Managed Services  Fixed fee – based on deliverables, or timeline  Percent of work completed  Monthly schedule for staff augmentation . ... Floyd Saunders, Andover, KS
    10. 10. Capital EvaluationCapita Is A Capital Investment Required? l  Asking questions about capital investment projects:  Is a new long-term project going to be profitable? When?  Is my money better invested in another project?  Should I invest even more in an ongoing project, or is it time to cut my losses?  Now take a closer look at each of those projects, and ask:  What are the negative and positive cash flows for this project?  What impact will a large initial investment have, and how much is too much?  What you need is a way to come up with a common baseline or method to evaluate costs and returns of potential project investments/ Floyd Saunders, Andover, KS
    11. 11. Calculate NPV and IRR Net Present Value results in a answer in dollarsCapita First determine the cash flows for each period. If C(n) is the cash flow for each period, l then: NPV = C(0) + C(1)/(1+r) + C(2)/(1+r)2+ C(n)/(1+r)n Internal Rate of Return result is percentage figure, that can be compared to other potential investments .  IRR is the rate at which the project NPV equals 0.  It also provides the expected return rate of the project, assuming certain conditions are met. and you find IRR by setting NPV = 0 and solving for “r” above. (Excel’s IRR function makes this all a cinch by running iterations.)  When using NPV to determine whether or not to invest in a project, the general rule is to accept the project if NPV > 0 and reject if NPV is negative (or zero). Floyd Saunders, Andover, KS
    12. 12. Practice Exercise - NPV and IRR What is the present value of a $120,000 cash flow arriving in Year 2 of a project? Assume a cost of capital of 8%. $102,881 (discount the cash flow twice, once for each time period@8%) What is the present value of a $4,000,000 cash flow arriving in Year 1 of a project? Assume a cost of capital of 10%. $3,636,364 (discount the cash flow just one time @ 10%). Floyd Saunders, Andover, KS
    13. 13. Comparing Projects  NPV determines whether a project earns more or lessCapital than a desired rate of return (also called the hurdle rate) and is good at finding out whether or not a project is going to be profitable.  IRR goes one step further than NPV to determine a specific rate of return for a project.  Both NPV and IRR give you numbers that you can use to compare competing projects and make the best choice for your business. Floyd Saunders, Andover, KS
    14. 14. Project Decision Making Present Project proposals are presented to business client or company management.  Where you are able to submit proposals with an understanding of the client’s financials, you are making it easier for the client to say YES to your proposal  Include in your proposals a - Summary of Financials Floyd Saunders, Andover, KS
    15. 15. Management Presentation  New text needed hereApproval Floyd Saunders, Andover, KS
    16. 16. Client Proposals  Client requirements are going to varyApproval Informal discussions often lead to unsolicited proposals leveraging our innovation teams  Formal requests for proposals or requests for information Normally have instructions for how to respond Normally contain a detailed set of questions to answer or format for the response.  Engage the Management teams early to help insure the best change at successful bids Floyd Saunders, Andover, KS
    17. 17. QuestionsFloyd Saunders, Andover, KS
    18. 18. Module Summary• Identify key elements used in project selection decision criteria• Calculate Net Present Value for a project investment• Calculate Internal Rate of return• Calculate Economic value added• Evaluate capital requirements for a project• Complete the project decision making process Floyd Saunders, Andover, KS
    19. 19. Post Workshop Action Plan Complete the Post Workshop Action Plan Floyd Saunders, Andover, KS 19
    20. 20. Service Offerings From Floyd SaundersInnovation Management Innovation Management Innovation Coaching Innovation Promotion & Campaign plans  Creative Thinking – SLG uses a variety of techniques to Innovation Kick Start Programs stimulate your teams in creative thinking, critical to developing Innovation Coaching an innovative mindset Management of Innovation Labs  Guided Facilitation – using techniques learned from contextual Innovation Program Management design, six sigma and agile methods, our coaches guide the development of innovation ideas from concept to market launch  Product Design - Our coaching techniques guide the design Innovation Labs development process with a range of tools and techniques to spur moving innovation forward quickly Independently creates product prototypes and proof of concepts allowing for focused development efforts Reduces time to market for new product development Project Management  Structured use of project management lifecyclesInnovation Kick Start Workshops  Project planning, tracking, controlling and implementation services Designed to spur creative thinking, collaboration and  Project Management Training innovation Increases the organizational awareness of the value of innovation and innovative thinking Program Management Provides a set of skills and tools for managers to deploy as they expand innovative ideas into products ready for market.  Creating and Management of the Project/Program Office Expands the organizational culture to be a team of  PMO Maturity Assessments innovative thinkers.  Project status reporting and metrics programs Spurs Innovation and reduces Time to Market  Project Manager Development Programs Intended to result in creation of new products and  Knowledge Management or services with revenue targets Floyd Saunders, Andover, KS Proprietary, all rights reserved
    21. 21. Getting Started Floyd Saunders, Andover, KS Proprietary, all rights reserved
    22. 22. Thank you Saunders Learning Group