If you are having trouble convincing your CFO to spend money on capital expenditures in this challenging environment, you are not alone. Forecasters are projecting a significant decrease in capital spending for 2009, which is making buying new software and hardware very difficult to get approved by senior finance executives.
So how does a software development manager convince a CFO to spend money on new software and equipment? CFO’s are seeking ways to increase the efficiency of how organizations deploy resources as well as how to control costs. So focus on the Return on Investment (ROI), or net cost savings from the increased efficiencies, when you try to convince your CFO to approve a purchase.
The following is an example in which a company is determining whether to hire a new engineer or buy new software and hardware for the team whose productivity needs to increase 20%:
Assumptions
- Cost of software and hardware to be acquired – $50,000
- Size of team – 5 engineers
- Increased productivity from acquisition – 20%
- Average fully loaded cost of an engineer – $125,000
Cost Benefit or ROI
Based on the assumptions above, if the team were to increase its productivity by 20% without purchasing new software or hardware, they would need to add one engineer (20% x 5 engineers) at a fully loaded annual cost of $125,000. Accordingly, if it is expected that the workload of the team is going to increase by 20%, it becomes an easy decision: spend $50,000 on new software and hardware instead of hiring a new engineer at a cost of $125,000, for a net cost savings of $75,000.
The typical CFO is also likely to question whether demands on the QA team will really increase and when the timing for the purchase of new equipment has to be made. When this question comes up, and it will, you can now argue that if demand actually stays the same or decreases, you will be in a position where you can reduce headcount by 20% (a savings of $125,000) without losing any capacity. This is the beauty of focusing on the efficiencies created from deploying new software and hardware
Summary
Engineering budgets are dominated by personnel costs. If you focus on the efficiencies that will be created from deploying new software and hardware and tie it to either being able to cut headcount or not having to hire new staff, you will almost always be able to convince your CFO to open up the purse strings!
About The Author
Peter Dreifus was invited to contribute to our Distinguished Lecturer Series because of his experience as a CFO and COO managing finance and operations at software and technology companies. Mr. Dreifus is a CPA with over 20 years experience and has held a variety of senior finance positions at Escher Group, Ltd., Sequence Design, Inc., Avery Dennison Corporation and the accounting, tax and consulting firm Deloitte.
Good article. How does “risk” enter the equation … does a high-ROI/high-risk option require different justification from a low-ROI/low-risk option?
Risk always enters the equation when you are talking about capital expenditures. Remember, whenever you are purchasing new software or equipment it is to enable the development or delivery of your company’s products or services or manage some aspect of your business and you can’t afford to fail. Therefore, in evaluating most potential purchases, it has to be about the efficiencies that will be created or intangible benefits like customer satisfaction – in most cases you don’t want to have the risk of failure.