In the last post post of this series, we talked about the utilization of KPIs in project management.
We discussed the usefulness of KPIs to monitor the health status of a project, and we introduced some of the characteristics a KPI should have to be effective.
We also stressed the point that, as project managers, we are not bonded to rigid financial formalisms.
Obviously, when the time comes for proper financial reporting, it is better to rely on the financial and the accounting departments. Nonetheless, during day-by-day activity, there is no need to be ashamed by adopting a “quick & dirty” approach, even if just to understand when it is time to request a sound financial report.
In the following, we will skim through some KPIs, which you may find useful for monitoring purpose.
We consider a project several months long, complex enough to have assets and a financial management more structured than a simple collection of invoices. In some case, an actualization of the figures before KPIs evaluation could be required.
Measures of efficiency
Area profitability ratio = Area revenues / Area expenditures
Where
- Area revenues are all the incomes accrued by the project in a single project management area (e.g. quality management, risk management…). The term revenue is used here in a very broad sense, considering actual incomes, avoided expenditures, cashable benefits, and monetization of not cashable benefits.
- Area expenditures are all the expenditures accrued by the project in a single project management area (e.g. quality management, risk management…).
The ratio measures how many Euros the project gets back, for each Euro invested in a single project management area. The ratio should be greater than one; if it is smaller than one, you are losing money; if it is equal to one, you are at break even.
Work package profitability ratio = WP revenues / WP expenditures
Where
- WP revenues are all the incomes accrued by the work package. The term revenue is used here in a very broad sense, considering monetization of business value, actual incomes, avoided expenditures, cashable benefits, and monetization of not cashable benefits.
- WP expenditures are all the expenditures accrued by the work package.
The ratio measures how many Euros the work package gets back, for each Euro invested in it. The ratio should be greater than one; if it is smaller than one, you are losing money; if it is equal to one, you are at break even.
The ratio could also be applied to iterations instead of work packages, provided you are using an Agile management methodology or framework.
Measures of productivity
Backlog of completed activities = Completed activities / Planned activities
Where
- Completed activities are all the activities comprised in the scope of the project and deemed as completed.
- Planned activities are all the activities comprised in the scope of the project.
The index represents the percentage of completed activities in the project’s scope.
In case there is a fair estimation of the effort of each activity (in man/hour or story points), these values can be proficiently used to evaluate the KPI.
Late backlog = Activities behind schedule / Planned activities
Where
- Activities behind schedule are all the activities comprised in the scope of the project behind schedule.
- Planned activities are all the activities comprised in the scope of the project.
The index represents the percentage of activities that are running late and measures the efficiency of the management of the project, rather than the project status in term of schedule.
Measures of Financial Condition
Current ratio = Current assets / Current liabilities
Where
- Current assets are cash plus assets of the project.
- Current liabilities are liabilities of the project.
The ratio measures the capability of the project to pay back its liabilities using its assets.
If we consider just assets and liabilities that can be converted to cash in a short time (weeks), the ratio measures the capability of the project to generate enough cash to support operations under stress.
A high ratio indicates that a project is able to face unexpected straits, even if it can suggest that the project is not putting enough capital at work to exploit a leverage effect.
If the value of the ratio is too low, the project run the risk to lose the great part of its assets quite fast.
In any case, a current ratio below one is always something that demands further investigations.
Days sales outstanding = (Accounts receivable / Total supplied services)*Days
Where
- Accounts receivable are revenues to be collected, in front of products or services supplied by the project in the period.
- Total supplied services are the total value of products or services supplied by the project in the period.
- Days are the days in the evaluation period.
The index measures the average number of days in which the project is able to collect revenues. Obviously, a high value suggests low proficiency in collecting due credits and so, the smaller, the better.
Measures of Profitability
Gross margin = (Supplied services - Cost of services) / Supplied services
Where
- Supplied services are the total value of products or services supplied by the project.
- Cost of services is the total costs of products or services supplied by the project.
Measures the project’s capability to retain revenues as gross profits, and to cover its operating expenses. The index also accounts for the efficiency of the project in delivering its services and products. If project A has a better gross margin than project B, then project A is more efficiently managed than project B.
The higher the value of this KPI, the better.
Net profit margin = (Supplied services - Expenditures) / Supplied services
Where
- Supplied services are the total value of products or services supplied by the project.
- Expenditures are the total costs of products or services supplied by the project, expressed as a sum of expenses, cost of services, interests and taxes.
Measures the project’s capability to retain revenues and to generate profits. If project A has a better net margin than project B, then project A is more profitable than project B.
The higher the value of this KPI, the better.
Debt service coverage ratio = Supplied services / Debt obligations in the period
Where
- Supplied services are the total value of products or services supplied by the project.
- Debt obligations in the period are the regular payments that the project has to do.
The index measures the capability of the project to pay debt-related obligations, exploiting the revenues.
A high value of this KPI suggests that the project will not face problem in repaying its debts, even if it may indicate a low working capital and an inefficient use of a leverage effect. A ratio smaller than 1 states that the project may be not able to generate enough cash flow to pay back its debts.
Return on equity = Net income / Invested money
Where
- Net income Revenues of the project detracting the costs.
- Invested money Money invested in the project.
The ratio measures the efficiency of the project in converting investments into profit.
In a future series of posts, we will dive into Earned Value Management (EVM), the prince technique to monitor the schedule and the budget of a project.
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