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For Your Business At Affordable Rates. It is not enough to build in a profit margin on the product or service being offered. You need to make decisions regarding how to allocate resources. For example, one course of action might require spending more than another.
I got very deeply involved in the guts of the technology. I was heavy into infrastructure and security. Got a few certs to make my business cards and CV look good, etc. Although I felt that I had a pretty good business acumen, I had trouble communicating with some senior management. I blamed them of course, damn computer illiterate luddites, the lot of them. To be fair, you have some who are technically savvy, but most of them are not.
Our CFO and senior management do not want to know nor need to know this. In this article, I am going to attempt to explain the financial techniques that you can use to transform technical considerations into a costing model that will make sense to your CFO. The techniques I cover here are used all of the time by senior management on a scale you can only dream of. Time Value of Money First up, we have to get a fundamental concept out of the way. While an economy has inflation, the same amount of money will be able to buy less and less as time goes on.
1 would, say, 5 years into the future. Consider petrol over the last few years. So, let’s discount the value of money over time by using the inflation rate. This can be expressed in a formula. Inflation hasn’t been taken into consideration. Well quite obviously, if we are going to take an initial outlay, and then determine the return of an investment over say, 3 years, we need to discount those returns to account for the time value of money. Additionally, the discount rate to apply is actually significantly higher than the inflation rate.
Now not all companies are awash with cash. Many have to borrow money to invest for the future and they have to pay commercial interest rates. Any investment made would have to have a better return that the interest rate. The companies that do have surplus cash can put that money into the bank or invest it.