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Finance for IT Decision Makers

Finance for IT Decision Makers

Michael Blackstaff

(2012)

Abstract

Finance is as fundamental to the IT world as it is to most other aspects of life. However, many IT professionals lack knowledge of the particular financial principles on which decisions about IT should be based. Assuming no prior knowledge, this new edition covers all relevant aspects of finance and is updated with International Financial Reporting Standards (IFRS) terminology. It is ideal for all IT decision makers who wish to conquer their fear of finance or refresh existing knowledge.
Michael Blackstaff is a chartered accountant with over thirty years' finance and marketing experience in the IT industry. He has worked as a financial marketing specialist with IBM, teaching salespeople the finance of selling and advising customers on finance and accounting for IT. He writes and teaches on finance for non-financial professionals.
This is a practical, readable and enjoyable guide to the financial factors that IT decision makers should consider when making an investment and how these relate to business operations.
Geoff Berridge
Finance is as fundamental to the IT world as it is to most other aspects of life. However, many IT professionals lack knowledge of the particular financial principles on which decisions about IT should be based - decisions that often have serious financial implications for their organisations. Assuming no prior knowledge, this new edition covers all aspects of finance relevant to IT professionals and is updated with International Financial Reporting Standards (IFRS) terminology. It is ideal for IT decision makers - managers, practitioners, buyers, sellers, consultants and project managers - who wish to conquer their fear of finance or refresh existing knowledge.
It is written in plain language and contains many practical examples.
Kybernetes

Table of Contents

Section Title Page Action Price
Cover Cover
Copyright iv
CONTENTS v
FIGURES AND TABLES x
AUTHORS xiii
FOREWORD xiv
ACKNOWLEDGEMENTS xv
ABBREVIATIONS xvi
PREFACE xvii
1 FINANCE AND ACCOUNTS: THE BASICS 1
OBJECTIVES 1
THE PURPOSE OF BUSINESS 2
COMPANIES OR CORPORATIONS 2
HOW A BUSINESS WORKS 4
EXAMPLE 1.1 PART 1: HOW TRANSACTIONS AFFECT THE STATEMENT OF FINANCIAL POSITION 7
EXAMPLE 1.1 PART 2: TYPICAL ADJUSTMENTS 12
EXAMPLE 1.1 PART 3: THE INCOME STATEMENT 15
EXAMPLE 1.1 PART 4: THE STATEMENT OF CASH FLOWS 17
RELATING CASH FLOW TO PROFIT 18
PUBLISHED ACCOUNTS 19
PLANNING AND MANAGEMENT ACCOUNTING 22
CASH FLOW FORECASTING 22
NON-BUSINESS ORGANISATIONS 23
SUMMARY 24
2 DECISIONS, DECISIONS… 25
OBJECTIVES 25
WHAT IS CASH FLOW? 25
A FINANCIAL CASE 25
WHAT IS DISCOUNTED CASH FLOW? 30
THE COST OF MONEY 31
PRESENT VALUE 32
NET PRESENT VALUE (NPV) 35
INTERPRETING PRESENT VALUES 37
OPPORTUNITY COST 37
‘FINANCIAL CASH FLOWS’ 38
INFLATION 38
SUMMARY 41
3 FINANCIAL CASES AND BUSINESS CASES 42
OBJECTIVES 42
COST CASES 42
FINANCIAL CASES 43
BUSINESS CASES 44
WHAT IS A BENEFIT? 45
CASH FLOW AND PROFIT 46
A BASIS FOR INVESTMENT DECISION-MAKING 50
SUMMARY 51
4 WHEN IS A BENEFIT NOT A BENEFIT? 52
OBJECTIVES 52
HOW TO BUILD AN IT FINANCIAL CASE 52
EXAMPLE 4.1: DESCRIPTION 53
EXAMPLE 4.1: SOLUTION 57
EXAMPLE 4.1: EXPLANATIONS 57
WHAT CASH FLOWS ARE RELEVANT? 67
IS IT A WORTHWHILE INVESTMENT? 70
SUMMARY 70
5 HOW FINANCIAL CASES ARE EVALUATED: PART 1 71
OBJECTIVES 71
PRESENT VALUE REVISITED 71
THE COST OF CAPITAL 72
WEIGHTED AVERAGE COST OF CAPITAL (WACC) 73
APPLYING PRESENT VALUES 74
THE NPV DECISION RULE 77
PROFITABILITY INDEX 77
INTERNAL RATE OF RETURN (IRR) 78
THE IRR DECISION RULE 82
NPV, IRR AND RISK 83
SUMMARY 87
6 HOW FINANCIAL CASES ARE EVALUATED: PART 2 88
OBJECTIVES 88
PAYBACK 88
PAYBACK AND RISK 90
DISCOUNTED PAYBACK 92
RETURN ON INVESTMENT (ROI) 94
ROI AND RISK 99
SHAREHOLDER VALUE ADDED (SVA) 101
EXAMPLE 6.1: SVA 102
THE METHODS COMPARED 105
SUMMARY 107
7 THE EFFECTS OF TAXATION 108
OBJECTIVES 108
BUSINESS TAX 108
‘DEPRECIATION ALLOWANCES’ 110
HOW DOES TAX AFFECT AN IT FINANCIAL CASE? 113
AFTER-TAX EVALUATION OF AN INVESTMENT 116
THE RESULTS COMPARED 118
TAXATION AND LEASING 119
SUMMARY 121
8 DEPRECIATION OF IT ASSETS 122
OBJECTIVES 122
DEPRECIATION OF IT ASSETS 122
STRAIGHT-LINE DEPRECIATION 123
REDUCING BALANCE DEPRECIATION 123
LOSS ON DISPOSAL 123
FREQUENCY OF DEPRECIATION CHARGE 124
DEPRECIATION OF UPGRADABLE ASSETS 125
SUMMARY 126
9 IT FINANCING AND LEASING 127
OBJECTIVES 127
INTRODUCTION 127
WHAT IS A LEASE? 128
LEASE DEFINITIONS 130
FINANCE LEASES 131
HOW ARE FINANCE LEASES ACCOUNTED FOR? 132
SALE AND LEASE-BACK 133
LEASING AND FINANCIAL CASES 134
OPERATING LEASES 136
RESIDUAL VALUE (RV) 136
HOW ARE OPERATING LEASES ACCOUNTED FOR? 140
RISK AND REWARD 141
VARIATIONS ON THE LEASING THEME 143
EXCHANGE LEASES 144
RENTAL 144
INTERNATIONAL FINANCING 145
‘SMALL TICKET’ LEASING 146
THE LEASING CONTRACT 146
THE FUTURE 147
SUMMARY 147
10 OUTSOURCING: FINANCIAL ASPECTS 148
OBJECTIVES 148
WHAT IS OUTSOURCING? 148
OUTSOURCING IN PERSONAL LIFE 150
OUTSOURCING IN BUSINESS 151
FINANCIAL CHARACTERISTICS OF OUTSOURCING 152
RISK AND SERVICE LEVELS 152
FINANCIAL EVALUATION METHODS 153
SERVICE ENHANCEMENTS 154
INFLATION 155
HOW TO BUILD AN OUTSOURCING FINANCIAL CASE 156
A WORKED EXAMPLE 157
EXAMPLE 10.1: DESCRIPTION 157
STEP BY STEP TO THE SOLUTION 162
THE TABLES 162
EXAMPLE 10.1: EXPLANATIONS 164
EXAMPLE 10.1: SUMMARY 184
OUTSOURCING DECISION CRITERIA 185
MANAGING THE PROCESS 186
SUMMARY 186
11 BUDGETING, COSTING AND PRICING: THE BASICS 188
OBJECTIVES 188
BUDGETING 188
DEPARTMENTALISED BUSINESSES 189
COST CENTRES AND PROFIT CENTRES 190
CHARGE-OUT 190
RESPONSIBILITY ACCOUNTING 191
THE IMPORTANCE OF OPERATING PROFIT 191
CAPITAL EXPENDITURE 192
REVENUE EXPENDITURE OR ‘EXPENSE’ 193
BUDGETS AND LEASING 194
COSTING AND PRICING 196
VARIABLE COSTS 197
FIXED COSTS 198
CONTRIBUTION 199
PRICE/VOLUME CALCULATIONS 201
COSTING IN MANUFACTURING 203
ART VERSUS SCIENCE 206
SUMMARY 207
12 FINANCIAL ANALYSIS: THE BASICS 208
OBJECTIVES 208
FINANCIAL ANALYSIS 208
EXAMPLE 12.1: A SAMPLE COMPANY 210
PROFITABILITY RATIOS 214
ACTIVITY (OR CAPITAL PRODUCTIVITY) RATIOS 216
LIQUIDITY (OR CASH MANAGEMENT) RATIOS 220
GEARING OR LEVERAGE RATIOS 221
STOCK MARKET RATIOS 222
OTHER RATIOS 223
SHAREHOLDER VALUE ADDED 223
SUMMARY 225
APPENDICES 227
A1 DISCOUNT TABLES 229
THE PRESENT VALUE OF A LUMP SUM 229
THE PRESENT VALUE OF AN ANNUITY 229
ANNUAL EQUIVALENT ANNUITY 232
A2 FINANCIAL CHARACTERISTICS OF DIFFERENT BUSINESSES 234
MANUFACTURING BUSINESSES 234
BUYING AND SELLING BUSINESSES 234
SERVICE BUSINESSES 235
A3 PUBLISHED ACCOUNTS 236
A4 ACCOUNTING FOR LONG-TERM CONTRACTS 242
A5 DEBIT AND CREDIT 243
GLOSSARY 245
FURTHER READING 255
INDEX 256
Back Cover 259