Finance for IT decision makers

Few IT managers have the the knowledge and training they need to express the value of IT to the business in pure financial terms. This guide highlights some of the issues that often cause difficulty.

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IT managers, end user managers, project managers, procurement people, sales people, IT or business consultants all have to make or influence decisions about IT. However, IT is only of value if it contributes to the ultimate purpose of the organisation using it, and that contribution is usually measured in financial terms.

Michael Blackstaff will be presenting the IRM UK seminar Finance for IT Decision-makers in London, 9-10 March.

Even for many financial people, making decisions about IT, with its particular characteristics, is not an everyday occurrence. Making financially unsound decisions about IT should not be an option, especially when the economic environment is tough.

There are some financial matters that often cause particular difficulty to IT decision makers. They are summarised in the following paragraphs.

Justification - the financial (or ‘cost/benefit’) case

We live in difficult times. Some organisations are able to invest their way out of recession; others unfortunately are having to cut back, at least temporarily, by disinvesting, cancelling or delaying IT (or other) projects. Fortunately the same financial justification and evaluation methods are applicable to all these activities.

It is easy to get IT financial cases magnificently wrong. The information that they contain has often been contributed by people from different disciplines. These may include people from IT, purchasing, legal, personnel, and other ‘user’ departments who may not have been financially trained.

They may also include financial people who may not necessarily be specialists in the particular financial and accounting challenges posed by IT. People running small businesses may have the superhuman task of having to wear all the above ‘hats’ themselves.

There are different rules for ‘cash flow’ and ‘profit and loss’ cases respectively. For example, cash flow cases include the cost of fixed assets and any sale proceeds, but exclude depreciation and loss on sale because these are not cash items; the converse applies to profit and loss cases.

It is also important to know how to identify attributable costs and benefits and to handle ‘opportunity costs’, ‘sunk costs’, attributable changes to working capital, cross-charges (allocations), inflation, leasing, interest and other ‘financial’ outgoings or income.

Evaluation

‘Return on investment (ROI)’ has an everyday meaning, but also a specific one. ‘ROI’ is the only investment evaluation method that is applicable to ‘profit and loss’ financial cases. All the other commonly-used methods apply only to cash flow cases.

These include: net present value (NPV), internal rate of return (IRR), payback, discounted payback and a variation of what is sometimes called ‘shareholder value added (SVA)’. All these methods, if used inappropriately or applied to the wrong kind of financial case, will give meaningless results.

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