# Financial and Project Management Tools of Control

## Gantt Charts

Gantt charts display the duration of steps in a project and are used by project managers to track the time and sequence of each step.

### Learning Objectives

Compare the advantages and disadvantages of utilizing a Gantt chart to illustrate a project schedule

### Key Takeaways

#### Key Points

• Gantt charts illustrate the start and finish dates of the terminal and summary elements of a project. Gantt charts also display the expected duration of each stage of a project as well as the expected order of each stage.
• The axes of a Gantt chart include the duration (weeks, months, and so on) of each step of the project and descriptions of each step. Gantt charts can also show the completion rate of the project steps that are currently underway.
• Gantt charts help communicate the goals and objectives of projects, their timeline, and the expectations project managers have for completion rates for the project.
• Although a Gantt chart is useful and valuable for small projects that fit on a single sheet or screen, they can become too large and unruly for projects with very large numbers of activities.

#### Key Terms

• project management: The discipline of planning, organizing, securing, managing, leading, and controlling resources to achieve specific goals.

A Gantt chart is a type of bar chart developed by Henry Gantt to illustrate a project schedule. Gantt charts show the start and finish dates of the terminal and summary elements of a project. Gantt charts also display the expected duration of each stage of a project as well as the expected order of each stage.

The axes of a Gantt chart include the duration (weeks, months, and so on) of each step of the project and descriptions of each step. Gantt charts can also show the completion rate of project steps that are currently underway.

Gantt charts are used in many types of projects, including technical projects and simple projects. Today they are commonly used, but when they were first introduced Gantt charts were revolutionary.

### Relevance to Management

Gantt charts are especially useful for management professionals because they display multiple steps and active components simultaneously. Management is tasked with understanding a wide variety of processes at any given instant and allocating resources or adjusting policy based upon this understanding. Gantt charts enable real-time tracking of each phase of a given project (or series of projects), and allow managers to quickly update and communicate broad arrays of information chronologically.

Gantt charts can be used to show the current schedule status using percent-complete shadings and a vertical "TODAY" line. Because they are so commonly used, Gantt charts can be used and understood by audiences around the world.

Gantt charts also help communicate the goals and objectives of projects, their timeline, and the expectations project managers have for completion rates for the project. They serve as a communication device among team members to discuss the goals of the project and make realistically appraisals of the current timeline. Thus they provide a useful visualization of strategy in action.

Although a Gantt chart is useful and valuable for small projects that fit on a single sheet or screen, they can become too large and unruly for projects with a large number of concurrent activities. Larger Gantt charts may not be suitable for most computer displays.

Because Gantt charts focus primarily on schedule management, they represent only one of the triple constraints for project management (cost, time, and scope–Gantt charts show only time). Moreover, since Gantt charts do not convey the size of a project or the relative size of work elements, the magnitude of steps behind schedule can be easily mis-communicated. If two projects are the same number of days behind schedule, the larger project has a larger effect on resource utilization, but this difference is not expressed on a Gantt chart.

### Construction of Gantt Charts

In the following example there are seven tasks labeled A through G . Some tasks can be done concurrently (A and B) while others cannot be done until the predecessor task is complete (C cannot begin until A is complete).

Additionally, each task has three time estimates: the optimistic time estimate (O), the most likely or normal time estimate (M), and the pessimistic time estimate (P). The X axis displays the expected duration of the project and the bars show how much time each step of the project is expected to take as well as when the step will take place in relation to the rest of the project.

Gantt chart: Gantt charts are used in project management scheduling.

## CPM and PERT Charts

CPM and PERT are charts used to determine the sequence and maximum and minimum timing of activities in a project.

### Learning Objectives

Outline business processes within project management utilizing the critical path method (CPM) as a control function and diagram projects within project management using the program evaluation review technique (PERT) chart

### Key Takeaways

#### Key Points

• CPM diagrams each step of a project(s). This includes a list of tasks and the time (duration) that each task should take to complete, and the sequence of and dependencies between tasks.
• CPM uses task sequence and timing information to lay out the longest path of planned activities to the end of the project and give a time window during which the step should be completed to keep it from interfering with later steps.
• A PERT chart is a diagram for CPM that represents tasks with an arrow diagram. PERT charts are more simplistic than CPM charts because they simply show the sequence and timing of each step in the project.
• CPM/PERT charts are useful in determining where potential delays may occur in a project and deciding the sequence of tasks. This helps project managers organize tasks and ensure that time is managed appropriately at each stage of the project.
• The cumulative process of transforming various independent efforts into an interdependent value -added proposition is often complex; CPM/PERT charts allow project managers to visualize tasks chronologically.

#### Key Terms

• Critical Path: In a CPM diagram, the longest time period that any series of tasks will take. This amount of time becomes the maximum amount of time needed to complete the project.

The critical path method (CPM) is a project modeling technique that was developed in the late 1950s by Morgan R. Walker and James E. Kelley, Jr. CPM is commonly used for projects in construction, aerospace and defense, software development, research projects, product development, engineering, and plant maintenance. It is particularly useful for projects that have interdependent steps and/or processes.

### CPM Inputs

CPM diagrams each step of a project(s). This includes a list of tasks and the time (duration) that each task should take to complete, and the sequence of and dependencies between tasks (such as "Step A has to be finished before moving to step B"). CPM uses task sequence and timing information to lay out the longest path of planned activities to the end of the project and give a time window during which the step should be completed to keep it from interfering with later steps.

Project managers can glean a lot of information about the timing of the project by following the pathways created in the CPM diagram between the different steps. They can determine which tasks need to be completed first and how much time can be spent on those tasks before they delay other parts of the project.

### The Critical Path

Managers can also use CPM to determine which set of tasks is likely to take the longest. For example, if Step A has to be completed before Step B, which has to be completed before moving to Step C, but Steps D, E, and F can all be completed independent of each other, Steps A, B and C form the longest series of tasks in the project.

PERT chart: A PERT chart shows the timing of a project.

The longest series of tasks in a project is referred to as the "critical path;" in this case, it would be A-->C. The critical path is the sequence of project network tasks that combine for the longest overall duration. The critical path also tells the project manager the shortest possible time period in which the project can be completed since the timing of the project will be dependent on the completion of critical path tasks.

### PERT Chart

A PERT chart (program evaluation review technique) is diagram for CPM that represents tasks with an arrow diagram. PERT charts are more simplistic than CPM charts because they simply show the timing of each step of the project and the sequence of steps.

Standard CPM charts are more complex than PERT charts because they illustrate the sequence of steps and place a diagram around each step that shows the earliest and latest possible time that each task in the project can be completed.

CPM Chart: A CPM chart is similar to a PERT chart but includes more detail about the latest and earliest possible times at which each stage of the project must be completed. The earliest possible time (in green) are calculated by determining the earliest start times of all activities on the critical path before that activity. The latest possible times (in blue) are calculated by adding all of the latest possible times of the activities before the critical path. In this CPM chart, the critical path is A-B-C-D-E since that pathway takes the most time to complete of any of the other potential pathways available. The total float time (lime green), or TF, represents the amount of time flexibility a task has between start and end times.

### Managerial Implications

CPM/PERT charts are useful in determining where potential delays may occur in a project and deciding the sequence of tasks. This helps project managers organize tasks and ensure that time is managed appropriately at each stage of the project.

Project managers are master multitaskers, capable of seeing the forest of the long-term agenda through the trees of short-term objectives. The cumulative process of transforming various independent efforts into an interdependent value-added proposition is often complex; CPM/PERT charts allow project managers to visualize tasks chronologically. This time component is critical because understanding the prerequisites for each stage of development minimizes delays and ensures ideal resource allocation.

Finally, the concept of a critical path is integral to the usefulness of the model. Identifying which task grouping will determine the overall length of the project allows proper prioritization and enables deadlines to be shortened through increased effort in specific areas. This makes it easier for the project manager to effectively add value by reducing lead times.

## Financial and Budgetary Controls

Financial and budget controls help ensure project success by controlling (and giving visibility to) input resources and output returns.

### Learning Objectives

Use effective budgeting techniques and financial projections to maximize the potential success and control project objectives

### Key Takeaways

#### Key Points

• Determining the cost of a project is one of the most important initial steps for a project manager (PM). Financial and budgetary controls are critical tools in this process.
• Some tools that project managers can use to control finances and budgeting include payback period and other financial forecasting calculations, as well as budgeting techniques like variance analysis.
• One way to determine whether the budgeting plan is being adhered to is to compare the budget allotted for a certain period of time with the actual amount of money spent during that time. This is called a variance analysis.
• Financial forecasting calculations include basic payback periods and net profit values (NPVs) which calculate the period of time required for the return on an investment to repay the sum of the original investment.
• It is important for a project manager to conduct these financial forecasting calculations and budgeting controls to identify budgetary constraints well before costs are incurred.

#### Key Terms

• Variance analysis: The difference between a budgeted, planned, or standard amount and the actual amount incurred/sold. This difference can be computed for both costs and revenues.

### Why Managers Use Budgetary Controls

Determining the cost of a project is one of the most important initial steps for a project manager. If a project manager cannot stay within a controlled budget, they may not have the funds to complete the project. The budget and financial plan is typically created during the initial stage of project development. Costs and resources should be set during the initiation stage to adequately plan and allocate costs.

Some tools that project managers can use to control finances and budget include payback period and other financial forecasting calculations, and budgeting techniques, including variance analysis. These tools are critically important for project managers who need to control resources to ensure project completion. If resources are mismanaged, the project will be characterized by sunk costs (i.e., investments that procure no returns).

### Budgeting Techniques

Budgeting involves determining how much money will be needed to complete a project and the timeframe for spending it. The budget may be determined on an annual or monthly basis depending on how long the project is projected to run. An important part of budgeting is setting a plan that can be followed over the course of the project.

Example Budget Plan: Budget plans can be used to project incomes and expenses over the span of several months.

One way to determine whether the budgeting plan is being adhered to is to compare the budget allotted for a certain period of time with the actual amount of money spent during that time. This is called a variance analysis. A variance is the difference between a budgeted, planned, or standard amount and the actual amount incurred/sold. Variances can be computed for both costs and revenues to show a project manager whether they are adhering to the project budget.

### Financial Forecasting Calculations

Financial forecasting calculations, such as payback periods, calculate the period of time required for the return on an investment to repay the sum of the original investment. For example, a $1,000 investment that returned$500 per year would have a two-year payback period. Payback period intuitively measures how long something takes to "pay for itself." All things being equal, shorter payback periods are preferable to longer payback periods. Payback period is widely used because it is a simple and clear measure.

Payback period is limited by the fact that it does not include the time value of money; that is, people prefer to receive money sooner rather than later. Net present value (NPV) is a financial forecasting calculation that does include the time value of money. It determines the "current value" of a sum of money on an annual (or monthly) basis, the value that cash paid out years from now would have if it was paid out today. This is a complex financial forecasting model that derives real rate of return using interest and inflation to localize currency chronologically.

Both payback period and NPV can be used in project management in order to determine how much profit a project will bring in and when. It is important for a project manager to conduct these financial forecasting calculations and budgeting controls to identify budgetary constraints well before costs are incurred and to secure funding from top management. Once a project receives funding, the project manager will need to use budgeting controls such as variance analysis in order to stay within the budget and ensure the success of the project.

## Project Management Audits

Project management audits are used to determine and control the quality, completion, and timing of a project.

### Learning Objectives

Identify how project managers can use the common accounting concept of audits to achieve optimal levels of control and efficiency

### Key Takeaways

#### Key Points

• In project management and quality management, managers audit the steps and/or processes of a project systematically or randomly to ensure that it is meeting estimated completion and quality standards.
• An internal audit in project management is usually more or less like a check-up: it assesses the current state of a project and prescribes actions that will increase its success.
• A regulatory audit is an external verification that a project is compliant with regulations and standards.
• It is important to monitor how an audit is conducted so that employees or project team members don't perceive it as a sign that the project manager does not trust them to complete their work.
• Project managers benefit from periodic auditing in two broad ways: collecting performance data and ensuring managerial presence in various phases of the project.

#### Key Terms

• Best practice: A method or technique that has consistently shown better results than others, and is used as a benchmark.

The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product.

### Project Management Audits

This usually refers to audits in accounting, but similar concepts also exist in project management and quality management, as the auditing of steps and processes in a project systematically or randomly to insure that the project is meeting estimated completion and quality standards.

Like a project management audit, a quality audit is an external verification that a project is compliant with regulations and standard. A system of quality audits verifies the effectiveness of a quality management system. To benefit the organization, quality auditing should highlight areas of good practice and provide evidence of conformance (positive feedback) as well as report non-conformance and corrective actions (negative feedback).

### Types of Audits

An internal audit in project management is usually more or less like a check-up: it assesses the current state of a project and prescribes actions that will increase its success. Audits in project management also include regulatory audits to provide external verification that a project is compliant with regulations and standards. Best practices of auditing dictate that a regulatory audit must be accurate, objective, and independent while providing oversight and assurance to the organization.

### Why Project Managers Audit

Auditing and Communicating to a Project Team: When auditing a project, the project manager needs to be clear that the project team does not become suspicious or feel threatened by it.

Audits generally provide a good understanding of how a project is running and how in/effectively the project team is. Project managers benefit from periodic auditing in two broad ways. First, managers gain tangible data about specific components of the process performance and a good handle on how the project is aligning with long-term objectives. Second, auditing ensures that employees and contractors are aware of managerial presence (which motivates better performance) and show support for various elements of the project.

It is important, however, to monitor how an audit is conducted so that employees or project team members don't perceive it as a sign that the project manager does not trust them to complete their work. If team members are aware that an audit is coming, or if they have discussed the possibility with the project manager, they may be more open to the idea. If an audit comes as a surprise, it can create lack of trust and suspicion between the project manager and their team. It is important to consider interpersonal factors before conducting an audit of a project.

## Project Management Inventory

A key component of project management is controlling inventory trajectories and quantities to reduce costs and maximize returns.

### Learning Objectives

Discuss the importance of inventory management in maximizing utilization and achieving strong performance metrics

### Key Takeaways

#### Key Points

• PMs are constantly using inputs to generate outputs in standard operational processes, which necessitates a number of potentially costly inventory components.
• PMs strive to control the timing of inventory, the uncertainty of demand and supply availability, and overall economies of scale.
• A PM should leverage various technologies to better gather real-time inventory data. This could include RFID tags, bar codes, QR codes, and inventory management software integration.

#### Key Terms

• QR Code: Black modules (square dots) arranged in a square grid on a white background that can be read and processed by an imaging device (such as a camera).
• RFID Tag: Wireless tags with electromagnetic fields to transfer data, for the purposes of automatically identifying and tracking tags attached to objects.

An important consideration when determining how to best manage a project is inventory. Project managers (PMs) must manage all resource inputs for a given project; how they approach this can increase or reduce costs dramatically. From a project management standpoint, it is essential to track current inventory and create a process for managing inventory flow.

### Why Track Inventory?

PMs are constantly using inputs to generate outputs in standard operational processes, which necessitates a number of potentially costly inventory components. For example, if a given project involves perishables (such as food), there is a definite time limit on product value –once perishables spoil, their product value is zero. Careful chronological and quantity-based inventory questions must be answered to create a process flow that ensures the value of the goods being sold. In short, there are three general reasons to manage inventory:

• Time - Time lags in the supply chain at every stage from supplier to user require PMs to maintain certain amounts of inventory to use in this lead time.
• Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply, and movements of goods.
• Economies of scale - The ideal condition of "one unit at a time at a place where a user needs it, when he needs it" tends to incur a lot of logistical costs that result in bulk buying, transporting, and storing the goods.

Since inventory tends to get overstocked and is typically not well-managed, there may be a multitude of supplies that no one is using. PMs can use a number of inventory management techniques to cut costs and streamline operations and ensure that optimal quantities are bought, stored and distributed.

### Inventory Management Tools

Technology has dramatically changed the inventory management process. PMs can use technology to track real-time inventory statistics. A number of recent technological developments in inventory management include:

• RFID Tags - RFID (radio-frequency identification) tags are used to track the locations of various items, from components in an automobile assembly line to boxes of cereal shipped from a manufacturing plant to the grocery store. These little tags communicate vast arrays of location data to inform timing processes and ensure proper inventory levels.
• QR Codes - QR codes originated in logistics but have become popular in marketing as well. In the 1990s, QR codes were used for rapid component scanning linked to computer data systems to paint clear pictures of inventory process flows.
• Bar Codes - Like QR codes, bar codes are used to scan inventory information into a computer data system. When you purchase an item at a store, the bar code is scanned so that the manufacturer's inventory system can remove that item from their list of inventoried goods (transferring it to the income statement as revenue).
• Inventory Management Software - Each of the devices listed above requires a logistics software package capable of streamlining all of this data into a meaningful view of the supply chain. Inventory management control systems are the heart of inventory management for PMs because they provide information output to be manipulated, analyzed, and assessed to better understanding the inventory process.

RFID tree: This image illustrates the information flow of RFIDs, which is then streamlined into large data streams for PMs to track.

QR code example: Above is a description of a QR code, along with the data implications of various visual aspects of the image (which are processed and reported via software). Different components of the code reflect position, alignment, and timing.

## Break-Even Analysis

Break-even analysis can determine the minimum amount a company needs to sell in order to cover its costs with no gains or losses.

### Learning Objectives

Employ a break-even analysis and derive a break-even point when analyzing a business initiative or project

### Key Takeaways

#### Key Points

• In economics and business, the break-even point (BEP) represents the point at which there is no net loss or gain because costs and revenue are equal.
• BEP, in the control sense, is a feasibility model for continuing an existing operation or opening a new one.
• Break-even analysis represents the minimum quantity a company needs to sell to cover costs like rent, building expenses, utilities, and other aspects of day-to-day operations.
• As long as a business can cover the minimum costs, it is "breaking even" and can remain in business without turning a profit.
• Break-even analysis lets companies compare their production or sales numbers with the minimum they need to achieve in order to stay in business.

#### Key Terms

• fixed costs: Business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month.

### Break-Even Point

In economics and business, the break-even point (BEP) is when costs (or expenses) and revenues are equal: there is no net loss or gain and the business has "broken even" by earning back its costs.

### Identifying BEP

Break-even analysis determines the minimum quantity a company needs to sell in order to cover its minimum costs, including rent, building expenses, utilities, and the operational costs of running day-to-day operations. As long as a business can cover its minimum costs, it is "breaking even" and can remain in business even if it is not turning a profit.

For example: a business selling tables has a BEP of 200 tables per month. If the company sells fewer than 200 tables each month, it loses money; if it sells more, it makes a profit. Business leaders use this information to determine whether or not they will produce and sell 200 tables per month and proceed based on that analysis. If they estimate they cannot sell that many, they can reduce their fixed costs (renegotiating rent, keeping phone bills or other expenses down), reduce variable costs (paying less for materials per item produced, usually by finding a new supplier), or raise the price of their tables. Any of these approaches would lower the break-even point; the company might only need to sell 150 tables per month and pay its fixed costs if it can cover or alter them through other means.

A break-even analysis is typically depicted by a graph showing the midpoint between profit and loss with the axes as units sold and price of goods sold. The graph shows when sales can cover fixed costs so the company will be able to stay in business in the short-term. Over a longer period of time, other factors can come into play, like changes in rent or quantity sold, or other competitors entering the market.

Break-even analysis: Break-even points can be determined based on sales and total costs. The point is found at the number of units where loss and sales are equal.

### Project Managers and Break-Even Analysis

Break-even analysis lets companies compare their production or sales with the minimum point (the break-even point) they need to achieve in order to stay in business. Typically, companies want to produce above BEP in order to make a profit and will adjust their output level to surpass the break-even point.

Because they are in charge of specific process flows, understanding BEP and how to lower it through operational efficiency is central to the responsibilities of a project manager (PM). When making financial projections or pitching a new line of goods, the PM must estimate BEP and how they can exceed it in a given market. BEP, in this sense, is a feasibility model for either continuing an existing operation or opening a new one.

## Ratio Analysis

Ratio analysis is a useful tool for benchmarking the financial and operational efficiency of a project compared with other projects.

### Learning Objectives

Recognize the importance of ratios and ratio analysis in financial assessment and project control

### Key Takeaways

#### Key Points

• In project management, ratio analysis may evaluate the efficiency of the project and how well the project managers are controlling resources.
• Financial ratios in the corporate setting usually come from a company's balance sheet and income statement. These can include profitability ratios, efficiency ratios, activity ratios, and debt ratios. They can be applied to individual projects as well.
• Ratios used to determine a project's health include operating margins, profitability margins, efficiency ratios, and debt.
• Project managers should consider these ratios in relation to past, present, and future projects, making sure that they are investing in a project that will produce the best value for their dollar.
• The goal of any organization is profits, and ratio analysis allows organizations to see where dollars are being invested and the results on that investment in terms of profitability percentage.

#### Key Terms

• benchmark: When a manager compares metrics such as quality, time, and cost across an industry and against competitors.

Ratio analysis is used in finance and accounting to determine how a company is performing financially compared with other companies; efficiency and other production metrics may also be assessed. In project management, a ratio analysis may be related to the efficiency of a project and how well the project managers are controlling resources.

### Financial Ratios

Financial ratios in the corporate setting usually come from a company's balance sheet and income statement. These can include profitability ratios, efficiency ratios, activity ratios, and debt ratios. These are typically used to determine a company's financial health relative to industry benchmarks, but they can also be used to maintain financial control of specific projects by assessing their financial health.

Ratios used to determine a project's health include operating margins, profitability margins, efficiency ratios, and debt. Operating margin and total margin calculate the revenue a project is producing over expenses (a profitable output ratio). Operating margin considers only operating revenues and expenses (such as salaries, utilities, supplies) while total margin considers all revenues and expenses. There are many smaller ratios built into these broader operating margins as well, including output per employee, inventory turnover, and specific cost components in comparison with one another.

Other efficiency ratios that the project management team may consider include staff productivity levels, the number of activities completed in a set period, and expenses in relation to productivity.

Operating margin formula: The operating margin is found by dividing net operating income by total revenue.

### Application to Control

All of these ratios give the project manager a better sense of the health of the project. Project managers should consider these ratios in relation to past, present, and future projects, making sure that they are investing in a project that will produce the best value for their dollar.

The goal of process control is increased efficiency; ratio analysis uses a wide variety of point in similar projects as benchmarks to denote where efficiency can be enhanced, and underlines differences in profitability and efficiency that may sway resource allocation for the organization in the future.

The goal of any organization is profits, and ratio analysis allows organizations to see where dollars are being invested and the results on that investment in terms of profitability percentage. Project managers must justify their projects in this context to appease managerial concerns and considerations; thus ratio analysis is also useful in ensuring the viability and likelihood of renewal for a given project.