A Step-by-Step Guide to Financial Forecasting
Dial in your project's crystal ball by stealing my template!
👋 Hey, Kyle here! Welcome to The Influential Project Manager, a weekly newsletter covering the essentials of successful project leadership.
Today’s Overview:
Project Managers often struggle with unexpected financial overruns. Without accurate forecasting, it's challenging to predict costs and manage budgets effectively.
How can PMs easily create precise forecasts to stay on budget and on schedule?
This week's newsletter unveils a step-by-step guide to forecasting, empowering you to predict financial outcomes accurately and ensure project success. Also included is a (free) template that you can download and use right away.
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A Step-by-Step Guide to Financial Forecasting
Filed under: Project Management, Construction
Years ago, I was walking through my jobsite with one of my company's senior leaders.
I’ll be honest, I was nervous. This was my first big project as the lead, and I was eager to show off our progress.
We had everything under control: the site was safe, we were on schedule, and our work was quality.
My boss nodded along, offering occasional comments that felt like mild breezes against the backdrop of our achievements.
But then, just as we were finishing up, he paused, turning to face me with a question that hit me like a ton of bricks.
"How much jingle you got?" he asked, searching for the depth of our financial safety net - the extra money set aside for unexpected problems.
His question took me by surprise. I didn't have the numbers, so I fumbled for a response. His disappointment was evident.
"You need to have this information at your fingertips," he advised before walking away.
That moment changed everything for me. I promised myself I'd never be unprepared again. I'd always know exactly where we stood financially, down to the last penny.
This experience taught me the importance of financial forecasting, one of the most important tools to have under your belt as a project manager.
Just like a doctor’s stethoscope, forecasting allows you to dial into the health of your project and get a bird’s eye view of your profits and overruns.
Yes, forecasting can be tough. It might not be the reason you got into this field. But it's crucial for managing cash flow and making informed decisions. A good forecast can even show you where you can save money.
Check this guide out (and steal my template) to learn how you can master forecasting and keep your projects profitable.
What is Cost Forecasting?
Forecasting is the process of predicting the total costs and outcomes of a project. It uses data from past projects and the current one to make these predictions.
The goal is to update the original budget with real project progress and any changes that happen along the way. This helps spot any budget issues early and fix them quickly.
Each month, you generate a report looking at: (1) how much money you've spent, (2) how much of the project is done, and (3) estimate what it will cost to finish. The more up-to-date and accurate your information, like direct costs, fixed prices, work left to do, and how fast you're getting things done, the better your forecast will be.
A solid forecast lets your team make smart decisions, plan for the future, avoid unexpected problems, and keep everyone informed about the project's money situation.
In simple terms, it's about knowing exactly how much "jingle" you have, just like my old boss used to say.
How to Create an Accurate Forecast
Creating an accurate forecast doesn't have to be daunting. Here's how to streamline the process.
Before you begin diving into the numbers:
Understand your contract: Know the ins and outs of your project's agreement.
Review past financials: Look at your previous financial statements for insights.
Assess Your schedule, issues, and risks: Get a clear picture of where your project currently stands.
With a solid understanding of these elements, you're ready to craft your forecast.
🛠️ Choosing Your Tools
You can build your forecast using Microsoft Excel or opt for specialized software.
For those leaning towards software, I recommend INGENIOUS.BUILD for its ease of use and state-of-the-art financial features.
The Forecasting Formula:
Estimate at Completion (“EAC”) is the “Money already spent on the project (AC)” plus the “Money that will be spent to complete the project (ETC)”;
EAC = Actual Cost (AC) + Estimate to Complete (ETC)
In the above formula, you can get the actual cost (AC) from your financial or timesheet system. Now, the question is how to calculate the remaining cost, or ETC.
Step 1 - Categorize Your Expenses
Every project has a bunch of different types of cost that will be required to bring your project to life.
Break down your costs into categories:
Labor
Materials
Equipment
Vehicles
Software
Misc. other costs
This helps you see where your money is going.
Step 2 - List Your Expenses
Now start listing all your expenses and how much they cost per month or per week.
Detail your expenses, including their frequency (monthly or weekly) and cost. Adding them to a system like INGENIOUS.BUILD or an Excel sheet makes this step manageable.
Assign a name to each expense.
Determine its nature (fixed amount, time-based, percentage of revenue).
Classify it (labor, materials, etc.).
Note if it's a constant, variable, or one-time cost.
Example Expenses:
Project Manager Kyle (labor, hours per month)
Office Equipment (material, flexible, one time expense)
Scaffold Rental (material, fixed, monthly)
Forklift Rental (equipment, fixed, monthly)
Step 3 - Adjust Your Budgets
Your initial budgets might need tweaking as the project progresses.
For each expense, record your:
Total Budget
Cost to date
Estimated cost to complete
Using the formula, these data points will identify your potential savings or overruns, giving you a clear financial snapshot of your project.
📊 Sounds like a lot of work? Just steal my template!
If this sounds overwhelming, don't worry. You can bypass the setup by using a pre-made template.
I've created one that you can download and use right away:
Bringing It All Together
I've mentioned it before, but it bears repeating: as a project manager, your role involves turning the unseen into something tangible and manageable.
Creating an accurate forecast is a prime example of this. It allows your team to navigate financial aspects of the project efficiently and accurately, right from the start.
If the above seems like a lot of work, remember two things:
Forecasts evolve with your projects. Once you've established a solid forecasting process, it becomes a tool that adapts and grows with you, offering long-term benefits that can guide decision-making for years to come.
You'll mostly consult your forecast when necessary. Each time you do, it's a potential issue or question that you've preemptively addressed. That’s leverage right there!
So, what's the first cost you'll predict with your new forecasting tool?
🔮 Better forecasting, better profits with INGENIOUS.BUILD.
In construction forecasting, historical data and increased visibility is essential for making those smart decisions. With INGENIOUS, you’ll have all the project data you need for improved forecasting at your fingertips.
Take control of your project's financials with INGENIOUS. Our cutting-edge platform provides real-time visibility into project expenses, budget utilization, and financial outcomes, empowering you to make informed decisions. With automated reporting and seamless integration, INGENIOUS streamlines financial processes, ensuring projects stay on track and within budget.
Book a Demo (They'll Blow Your Mind).
Until next week,
Kyle Nitchen
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Good forecasting primer Kyle. I would add another step to your process. That is management of change (MOC). MOC is the process that keeps track of scope changes and non scope changes, like quantity design changes, material or labor pricing. Depending on the contract, these changes can affect your revenue, costs, or both.
So update the budget and forecast with MOC results each month.