PM Articles > Kent McDonald > Show Me the (Different Kinds of) Money

Show Me the (Different Kinds of) Money

I first found out about the concept of different kinds of money shortly after I was married. I don't mean different currencies or different denominations. I'm talking different types of money based on where it came from, how it should be spent, or what "pot" it is tracked in. My wife and I received some cash for a wedding gift. Even though I was responsible for managing our finances, she told me in no uncertain terms that the gift money we received should not be mixed with our regular "spending cash" or deposited in our checking account. It was given to us as a gift and it should be specifically on gift-like things. I found this annoying and irrational at the time, but being one to pick my battles I let it go and merely grumbled under my breath about it. It years before I recognized why different kinds of money exist, and the importance of understanding this concept when managing projects.

Companies fund projects from different pools of money based on the nature of the project and which financial aspects they are trying to focus on. Recurring projects that are necessary to keep the wheels on the bus are funded out of cash flow—basically, money coming in from ongoing operations is used to fund those projects. Think of this as the regular "spending cash" in my domestic example. These projects are usually expected to provide significant payback rather quickly. They are usually the projects that help keep the company in business and provide incremental improvements in products.

Contrast that with strategic projects, which do not offer the quick payback, and may not offer any payback at all. These projects are typically longer, riskier, and more expensive, and are usually intended to close substantial strategic gaps (real or perceived) or to start the company down an entirely new path. Because they usually aren't going to be done anytime soon, they are often funded from different sources—either from a company's reserves or through long-term debt. These types of projects are similar to the gift money my wife and I found ourselves with after our wedding, money to spend on things we normally wouldn't buy.

Money is also classified differently based on financial perspectives. In software development projects, for example, certain software development activities, such as design and development, can be depreciated as if the company had spent the same amount of money on purchasing software and treated it as a capital expenditure. Money spent on other activities such as analysis (figuring out what you want the software to do) and testing (make sure it does what you thought it would) cannot be depreciated, the thought being that you would have had to do that when purchasing software from someone else. I am not an accountant, nor would never claim to be one, so confirm those rules with someone who deals with this type of thing on a daily basis. I have only my experience seeing how the expenses incurred during different phases of a project were treated differently.

So why does it matter to you as a project manager where the money came from or how it is handled? As long as you don't blow through it faster than you said you would and have to go and ask for more, it's all the same, right? Well, if times are good and your project is relatively small and low risk, chances are it probably isn't that relevant. Unfortunately, times are not the best right now, and there seem to be a lot of expensive, high risk, bet-the-company projects going on right now. (At least, I have seen a lot more, but that may also be a function of my personal experience.) Either way, the kind of money funding your project heavily influences decisions made about your project.

Imagine, for example, that the company is running into some difficult cash flow times. If your organization is a little more enlightened than some that immediately put the workforce on the chopping block, they will start by examining the projects underway. The decision makers will take a long, hard look at the projects currently being funded from cash flow, and determine whether they will really spend as much as they are projected to spend, if there are ways to accomplish the aims of the projects in a more effective and efficient manner, and whether the projects make sense at all at the moment or if it is better to delay them until things are in better shape. These are all contingencies that you as a project manager need to be aware of and planning for. In fact, one could argue that you should be asking those questions about your project regardless of the situation, but scrutiny from others always seems to make thinking through those things much more important.

Projects funded out of the "gift fund" can face the same sort of scrutiny, but sometimes it can be even more intense and constant. Because these "strategic" projects tend to be long, costly, risky, and have little discernible payback, they tend to pop up on the radar of senior managers looking for a way to pull a large sum of money back into reserves at once. Of course these projects may also be the beneficiaries of this funding arrangement when cash flows are tight, based on the perverse logic that because these projects are not being funded from cash flow, they can continue in the hopes of the big wins that may occur in the future. It seems counter-intuitive, but it is all based on how an organization chooses to prioritize their financial health.

Experience has taught me that although you rarely have any control over which kind of money funds your project, you can often use that knowledge to your advantage in a variety of ways:

  • Understand the source of your project's financing, and how your organization manages that kind of money. If your project is funded from operating funds and your organization is very focused on cash flow, you will want to pay close to attention to not only how much money you will spend, but also what you will be spending it on, and when you will be spending it (especially if your project stretches across multiple fiscal years).
  • Keep an eye out for any events, either inside or outside your organization, which could impact the project's funding source. Did the organization's investment take a huge hit in the past year? (I know—whose didn't?) If your project is funded out of reserves, consider what that news may do to future decisions about projects. Likewise, if there are events in your industry that impact short-term cash flow and you are working on a project funded from operating funds, consider the possible impacts and get ahead of the game, such as by paying closer attention to project expenses. (No more reimbursing for consultants' $5 lattes for example.)
  • Make sure that your project truly delivers business value—that is, that it increases or protects revenue and/or reduces costs in alignment with organizational strategy—and has defined measurable goals to know when it is done. Of course, this should have been true from the beginning, but there are many examples of projects that get started without these characteristics through the sponsor's force of will. Ensuring your project truly does deliver value will help it withstand the glare of extra scrutiny.

It took me several years of working on progressively larger projects before I really understood the importance of knowing how the project is funded and using that information to help ensure the project was able to successfully accomplish what its sponsors had intended. Ironically, as that knowledge crystallized in my work life, the need to separate money at home became much less black and white. My wife and I are far less concerned about separating money into piles based on their source. Instead, we make saving/spending decisions based on how tempted we may be to spend those few spare dollars that may be sitting around.

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Understanding your company's strategic project selection criteria can help you peg your project—and your funding—on the scale between essential and expendable. Having a compelling business case can help you justify the project if the higher-ups disagree with your ranking (or understand how to modify the project in order to make a better case). And keeping track of your project budget and costs never hurts.

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