Statement of Revenue and Expense in Business
Now that we have examined all the tasks that are within the domain of the scope of the project, we can finally attack summing up all the financial aspects. Let’s put this into context, there is a good chance that by this time on a real information technology project that it is a go, but often this section is the make or break for the ultimate decision. Usually at the feasibility stage, at the very beginning, it usually weeds out projects that do not create value. This is typically the last step to justify the project with tangible, measurable financial result.
This module, you are a financial analyst for the company we have been talking about this session. Not to worry, we are not diving too deep into too many financial topics, but we are going to use data from past modules, make changes as necessary and add some new data to support the project moving forward. Borrowing from previous week’s work, you should have a good body of data that supports the project you have been pursuing. Here is where we should make some recommendations. If you found that the numbers do not work from last week’s assignment, you will need to adjust (and document this as well) to make sure that the project will be successful. This is not taken lightly, as any change will have to be clear and transparent as it will be presented to the highest level of the organization, therefore, it should have business justification, not simply change the numbers and expect no one will notice.
You will need some projects to complete the work in this module. We have been focusing largely on what we need to do and how much it will cost. If you recall from previous week’s work, you were assigned to be the project manager, but it was a late in the process, you came on pretty much just before the implementation, this is common, but it is advantageous to be part of the feasibility and early planning where the projected cost savings are determined. The later financial data, like last week’s work, supports (or not) the early calculations. Refer to previous modules since this is a continuation of the same project. This module we will make the following assumptions for simplicity:
- All computers that are replaced are new computers
- Every employee that gets a new computer makes $10 per hour ($400 per week).
- Every employee gets two weeks of vacation (works 50 weeks per year)
- There are 3 shifts, so calculate labor on 24 hours, 5 days a week.
- The speed of the new computers will do the same jobs in 45 minutes where the old computers took an hour to do the same work.
- All calculations are based upon 1 year.
- All numbers in the examples below are arbitrary and for example only, you will have different data for your report.
Hint: Project labor will need to be separate from employee labor who are getting computers.
You will create a major section called “Financial Data” as a section that will be put into the larger course project. You will have 4 chief areas that you will need to include in this section along with an introductory paragraph and a summary paragraph.
- You will give a 5-8 sentence paragraph giving an overview of the material you are about to present. It will point out any changes or important things to be aware of when the reader views the supporting data.
- You will create a SWOT Analysis subsection. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. This is a visual representation, divided into 4 quadrants that show the “why” we are doing this. The Strengths are our current capabilities, and what we do well. Weaknesses details where the gap is between where we are as an organization today and where we are trying to attain. The Opportunities represents what we will achieve by completing this project in direct response to the threats. The Threats are why we are compelled to do this now, does a competitor have some advantage that we should react to? There is more detail in this module’s activity for clarification and format. For the purposes of the course project, each quadrant should have 3 bulleted, short sentences that convey the overall picture. It will give some detail, but not be vague. Concise is the keyword here.
- You will create a Budget subsection. You will include your spreadsheet that details all your costs (line items and costs). This will be a carryover from prior week’s work, but if you must adjust any figures, you much also have a note to the right of the dollar amount explaining the variance.
- You will create a Return on Investment (ROI) section. This is the heart of the entire body of work this module. The ROI shows in one simple calculation that this information technology project will pay for itself and to what degree. There are two key steps, one that shows the cost saving or return in terms of dollars, and the other step show how much the return or saving will be expressed as a percentage. For example, let’s say a project costs $30,000 and the outcome that there is a savings of $50,000 in labor or lower product costs it would be expressed as shown below:
Labor Savings $50,000
Project Cost = $30,000
Total Savings $20,000
This can be expressed as a percentage for how much of a return it is:
Projected Cost Savings = $20,000 = 66.6% ROI
Invested Amount $30,000
- The next section to be included is a Break Even (BE) Analysis. It is important to understand that there is a return on investment, but it is almost equally important to understand how long it will take. Some projects take longer to realize savings and this can occasionally factor into the decision to do the project or seek quicker remedies with quicker returns. This is a case of “it depends” in many cases, only answered by the final decision makers on whether the project gets funded or not. The calculation is not difficult. We know from our ROI data that the project will make money and it is justifiable. Now we just need to know how long it will take. In the assignment this module, we know how much the project will cost. We know how much the total labor savings will be. If we divide the total labor savings (based on a year) by 12 months, we have labor savings per month. Then it is simple math:
Total Project Cost ÷ 1 Mo. of Labor Savings = Number of Months to BE
$40,000 ÷ $3,800 = 10.52 months until BE
- Lastly, summarize your findings and reiterate how you arrived at the numbers and if there are further recommendations needed.