Financial Management

5 minutes 5 Questions

Financial Management is a vital aspect of PPM contributing to ensuring the project portfolio delivers value in line with the organization's financial objectives. It involves activities such as budgeting, cost estimation, financial planning, cost control, and financial performance review. These activities help in understanding the financial health of projects, making informed budget allocation decisions across the project portfolio, and improving the cost efficiency of projects. Effective financial management helps companies realize the expected return on investment from each project in the portfolio.

Financial Management in Project Portfolio Management

Importance: Financial Management plays a significant role in Project Portfolio Management. It deals with the allocation and control of financial resources within a project. This ensures efficient use of resources, mitigates financial risks, and maximizes return on investment, contributing to the overall project success.
Concept: Financial Management integrates budgeting, cost estimation, cost management, and financial risk management. It focuses on aligning the project to strategic business objectives and providing measurable value.
Working: It starts with defining project budget, followed by periodic cost estimation and cost control to monitor and manage expenditure. Financial risks are identified, assessed, and managed to reduce impact on project costs.
How to Answer Questions in Exam:

Understand the question: It's crucial to read the question carefully and understand what it’s asking.
Use technical terms: To demonstrate your understanding, use Financial Management terminologies in your answers.
Be clear and concise: Ensure your answers are succinct, focus on the asked question.
Use practical examples: Cite examples to illustrate your understanding of concepts.

Exam tips - Answering Questions on Financial Management:

Revise thoroughly: Ensure you revise financial management principles, techniques, and terminologies.
Time management: It's imperative to manage time effectively during the exam.
Practice: Solve previous exam papers to familiarize yourself with the exam format and type of questions.
Understand the marking scheme: Know how marks are allocated to plan your answers effectively.

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Question 1

An IT service provider is working with multiple customers on a new data center. How can the service provider fairly allocate shared service costs among different customers?

One-time cost allocation Percentage-based cost allocation Equal cost allocation Random cost allocation Negotiate costs case by case Usage-based cost allocation

Correct Answer: Usage-based cost allocation

Usage-based cost allocation is the most appropriate method to fairly allocate shared service costs among customers. It ensures that customers are paying for the actual resources they consume, unlike other methods such as random, equal, or percentage-based cost allocation which can lead to unfair distribution of costs.

Question 2

A company has an IT division that provides internal support to other business units. Which of the following best helps create an understanding of the financial value of providing these IT services?

Product-based costing Project-based costing Customer-based costing Activity-based costing Service-based costing Department-based costing

Correct Answer: Service-based costing

Service-based costing helps in understanding the financial value of providing IT services by estimating the cost of each service individually. This gives more accurate data on the financial value of providing these services, as opposed to other costing methods that focus on different aspects of the business.

Question 3

In a project, during the execution phase, you discover that the costs are exceeding the estimates. What would be your best course of action?

Perform a variance analysis to understand the cause of the overrun and adjust future estimates accordingly. Stop project execution until further funds are obtained from the stakeholders. Re-allocate resources from less important parts of the project to cover costs. Ignore the overrun as it's a common issue in projects.

Correct Answer: Perform a variance analysis to understand the cause of the overrun and adjust future estimates accordingly.

The best course of action when costs are exceeding the estimates during project execution is to 'Perform a variance analysis to understand the cause of the overrun and adjust future estimates accordingly'. Variance Analysis is a standard tool in project management used to identify the cause of the variance from the planned performance and the actual performance. It helps in effective decision making and taking corrective measures if needed. The other options are not advisable because: - Ignoring the overrun problem may lead to project failure as it could increase further without understanding and addressing the root cause - Stopping project execution until further funds are obtained from stakeholders is not always the ideal solution. It could halt the progress and also stakeholders might not agree to provide additional funds without seeing the reasons of overrun - Re-allocating resources from less important parts of the project might affect those less important parts and overall project performance without ensuring that the overruns wouldn't happen in future.

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