Terms in economic management
When it comes to any kind of external projects for businesses, there are many concepts that are important to know, so it’s best to know what everything means in a quick and simple definition. So below are just some of the ones you will more than likely hear.
Quote: It would be the total estimated project cost at the beginning, considering both internal and external costs.
Cost baseline: One of the documents that are generated and approved at the end of the project planning process. This shows your spending budget throughout the project, as it arises from the schedule with the estimated costs for each task.
Margin risk: The expected economic impact of those risks that you must take after performing risk planning. This value is added to the estimated cost of the work to be performed, resulting in the total project budget.
Commercial revenue: Is the profit the company hopes to complete the project with. In good commercial negotiation, this is the value on which you can negotiate to reduce the selling price.
Sale price: Is the amount payable by the customer for the total project, and leaving the sum of the previous concepts.
Planned Value (PV): is the budgeted cost of the project at the beginning, during the planning for the total work done so far.
Actual Cost (AC): The costs incurred to date. Here you must take into account commitments already made payment for work performed, even if payment has not been made.
Budget at Completion (BAC): Is the initial budgeted cost for the project. Ultimately the budget you have to start the project.
Estimate at Completion (EAC): The estimated cost of the project upon completion. A conceptual level is calculated as the actual cost (AC) plus the estimated cost of all remaining tasks to complete the project (ETC).
Estimate to Complete (ETC): The estimated cost at a given time to complete the total outstanding project tasks.
Variance at Completion (VAC): The difference between the budgeted cost and estimated today for the total project. It shows the cost or savings on which we estimate will have to complete the project.
Planned Value (PV): At this point one may ask for a reference to the risks in the implementation phase. When one of these risks occurs and becomes a reality, so the value that you had considered for it in the risk margin, will become part of the PV and BAC. From the latter it follows that the final cost of the project will be between BAC and the BAC, plus risk margin.
It’s also interesting to note the following economic concepts of project management:
Costs incurred: The costs that you had to pay up to the present.
Invoice value is the total of the invoices issued and collected
These two concepts are important to track the project’s cash flow (cash flow) as an aspect that we must control to meet payments as they arise.
Cash flow is an issue discussed in the planning phase of the project, and ideally this should be positive for the entire project. However, in reality it may be that it is not. This will mean that the company that executed the project will finance this, seeking help from experts like thecheapaccountant.co.uk and having to consider financial costs as part of the budget. While the value to fund this in the planning stage is no problem, if it is higher, it will have higher financial costs, and consequently, a greater ETC.
Earned Value Method: This is a method widely used in the financial management of projects. This method consists of comparing the current cost and the current progress, the basis of cost, scope lines, and schedule, and from these to make predictions about the outcome of the project.
Earned Value (EV): is the economic value of the work done to date.
Cost variance (CV): is a parameter that compares the current cost to the initially estimated, determining the status of the project compared to the planned one.
Cost performance index (CPI): is equivalent to the previous parameter, but represented as a percentage. Mathematically, this indicates real progress has been achieved in terms of realised value, relative to the value spent.
An important recommendation for readers with little experience in project management is that commercial departments typically have a minimum trading margin to accept. Therefore they are monitored by the margin achieved in sales, which means you might be tempted to reduce the sale price by reducing the cost of the project or the margin risks. However, this will ultimately be a problem for the project manager.
If you would like to speak to The Cheap Accountant about your finances please do not hesitate to get in touch with us, we are always happy to help.