CARNEGIE MELLON UNIVERSITY CIO INSTITUTE

Transcription

1 CARNEGIE MELLON UNIVERSITY CIO INSTITUTE FORECASTING & BUDGETING BASICS Contact Information: Lynne Pastor

2 RELATED LEARNING OBJECTIVES 3.3 LO 1: Identify and describe modeling and simulation approaches. Include among the approaches systems dynamics modeling, benefit cost analysis, costing, capital planning and investment control, forecasting, sourcing models (build or buy), and transferability (how transferable it is to the mission). 7.4 LO 4: Discuss the role of forecasting in cost-benefit analysis. Include situations in which IT systems are making an investment in information that does not show up immediately in the ROI, but needs to be inserted into the ROI forecast. 1

3 BUDGETING COST MANAGEMENT Many IT projects are never initiated because IT professionals do not understand the importance of knowing basic accounting and finance principles Decision Makers are focused on financial justification Need for IT professionals to be able to present project information in financial as well as in technical terms. Typical mistake failure to spend enough early in IT projects More cost-effective to spend money on defining user requirements and doing early testing EVALUATING IT PROJECTS Cash flow analysis Return on Investment (ROI) Internal rate of return (IRR) Net Present Value (NPV) Cost-Benefit Tangible cost Intangible costs and benefits 2

4 COST TO CONSIDER Hardware Costs User interfaces Networking Processing Software Costs In house development and off-the-shelf Installation Costs Outsource Data entry & data conversion costs COST TO CONSIDER Environmental Costs Physical environment Human environmental & legal costs Running Costs Electricity, data communication costs, subscription fees 3

5 Maintenance Costs Security Costs Disaster recovery etc Networking Costs Hardware, software and management costs IS infrastructure and data management costs COSTS TO CONSIDER Training Costs Takes more time that excepted Organizational Costs Lost productivity due to migration CALCULATING BENEFITS REQUIRES CREATIVITY The Council of Economic Advisers in its 1993 Economic Report of the President Since a public good is not traded on a competitive market, the market cannot assign it a price based on its value. Measuring the benefits public goods provide is problematic. One method is to infer the value of public goods from actual markets or observable economic behavior. For example, to estimate the value people put on scenic beauty, economists may measure the effect of scenic beauty on actual real estate prices. The value that people put on a park may be reflected in the amount of time and money that they spend to visit and use it. 4

6 BUDGETING TECHNIQUES Analogous estimate Also called top-down-estimate Uses the cost of a previous similar projects Bottom-up estimate Estimate individual work items Aggregates work items to calculate project total Parametric modeling Uses project characteristic in mathematical model Example, 1 line of code costs $10 Computerized tools Spreadsheets Models and project management software SOFT BENEFITS? Examples Provide productivity benefits for remote and traveling workers Reduce user training and learning systems Reduce systems downtime and improve performance 5

7 HANDLING SOFT BENEFITS "Risk" adjust the benefits May not realize all of the expected benefits Improve customer service could increased transactions or revenue Recommendation Include only about 10% to 40% of any quantifiable soft benefit in calculating cash flow or ROI Include all identifiable benefits in notes or write up 6

8 FORECASTING FREE CASH FLOW IMPORTANCE OF CASH FLOW One of the most important aspect of planning a project is forecasting cash needs and receipts Profits Indicator of the performance May take a great deal of time before profits turn into cash Remember profitable businesses can fail if they have inadequate cash flow RECOGNIZE THE INVESTMENT IN WORKING CAPITAL Working Capital = Current Assets Current Liabilities Increase of assets reduces cash Increase in liabilities increases cash Therefore increase in Working Capital is a decrease in Cash Growth uses cash When growth rate decreases cash is generated Investment in working capital is recovered toward the end of the project 7

9 CALCULATING FREE CASH FLOW Calculate Net Profit after Taxes Add back depreciation Expense Calculate Working Capital Difference between Current Assets and Current Liabilities Add decrease or subtract increase in Working Capital Subtract Initial and any Additional Investments Add back any lump-sum received at the end of the project for the original investment 8

10 We hope you have found this session beneficial. Please note that the course material is for educational purposes only and is not intended to be used without the course presentation. The preceding information is not intended to be legal or business advice. Please consult competent professionals when implementing any of the techniques and methods discussed in this presentation. 9