Your Ad Here

Wednesday

You Need Portfolio Management if …

  • You can't identify your IT expenses to provide the foundation for calculating return on investment (ROI)
  • You  base your IT investment decisions on intuition instead of facts
  • You can't tie your IT asset management system to your financial system
  • You don't know how, or if, you will save money by consolidating legacy networks
  • You can't find $100K for an initiative that will save you $6M

Thursday

Project Funding Process and Control


Interesting times for me right now on the current client I am with. I am working for the finance division looking at the funding process for projects. However, the technology (CIO) group has suggested their own process for this and currently both organizations are fighting over who will have control over the project funding and selection process. I have been on both sides of the fence before and its interesting to see how political this is getting, rather than focusing on the underlying principle of what is the simplest process that will bring the best return on investment and benefits for the organization. I see this time and again at big organizations and I guess this is what creates more work for me!

Your thoughts on this?

Wednesday

Payback period


I needed to find some information on Payback period which is required for the business case my client is currently developing. Here is what I found from Wikipedia.

Payback period in business and economics refers to the period of time required for the return on an investment to "repay" the sum of the original investment. For example, a $1000 investment which returned $500 per year would have a two year payback period. It is intuitively the measure that describes how long something takes to "pay for itself"; shorter payback periods are obviously preferable to longer payback periods (all else being equal). Payback period is widely used due to its ease of use despite recognized limitations, described below.

The expression is also widely used in other types of investment areas, often with respect to energy efficiency technologies, maintenance, upgrades, or other changes. For example, a compact fluorescent light bulb may be described of having a payback period of a certain number of years or operating hours (assuming certain costs); here, the return to the investment consists of reduced operating costs.

Payback period as a tool of analysis is often used because it is easy to apply and easy to understand for most individuals, regardless of academic training or field of endeavor. When used carefully or to compare similar investments, it can be quite useful. As a stand-alone tool to compare an investment with "doing nothing", payback period has no explicit criteria for decision-making (except, perhaps, that the payback period should be less than infinity).

The payback period is considered a method of analysis with serious limitations and qualifications for its use, because it does not properly account for the time value of money, inflation, risk, financing or other important considerations. Alternative measures of "return" preferred by economists are internal rate of return and net present value. An implicit assumption in the use of payback period is that returns to the investment continue after the payback period. Payback period does not specify any required comparison to other investments or even to not making an investment.

Basic formulae
Payback period = Investment / Cash flow Used if cash flows are the same for the duration of a project
Payback period = (Last year with a negative cash flow) + (absolute value of net benefits / total cash flow next year)

The one issue I have with payback is that projects or programs that take a while to payback (but have big benefits) down the line, may be missed if payback is one of the key selection criteria. Ah well, trying to explain that to my client.