Why you should start with capex

…in the same instand you have finished reading this article

Yes we are agile. We are doing the right things and we are doing the things right. And all that stuff. It is great to work in a real agile surrounding. It is fun, it is productive and effective. But then, when the year is over, tax men come along and say something like:

“Your profit is this high? You have to pay taxes this high!”

And perhaps now your values, your fun and your effectiveness go overboard like a reuse in a storm at Bering Sea. Old management overtakes, because “agile didn’t work”. Now you’re not longer captain on the ship.

But wait, how come?

This is the point I started thinking about just a few months ago and am still so shocked, I never thought that way or asked further questions. Perhaps you understand me after this — hopefully short and informative — article.

Theory

This is finance guy speech and vocabulary, but you have to know this.

  • Capitalizable Expenses
    Capital expenditure or capital expense (“capex”) is an expense where the benefit continues over a long period, rather than being exhausted in a short period. Such expenditure is of a non-recurring nature and results in acquisition of permanent assets.
  • Operational Expenses
    (opex or just expenses) is an ongoing cost for running a product, business, or system.
  • Intangible Assets
    An intangible asset is an asset that lacks physical substance (unlike physical assets such as machinery, software and buildings) and usually is very hard to evaluate. It includes patents, copyrights, franchises, goodwill, trademarks, trade names, the general interpretation also includes software and other intangible computer based assets.

In Practice: Heating up the room

In finance they are talking about two ways to spend money to heat a room:

  • Either you burn it. It gets warm, money is gone, no mid/long term value created.
  • Or you buy a oven and fuel. It gets warm, more money is gone, but you’ve created long term value, which you could show to your landlord (tax office) and probably get discount on rent (taxes).

Finance guys part between Operational Expenses (opex aka burn money) and Capitalizable Expenses (capex, Buy oven and fuel). The more capex you can track, describe and proof in front of a financial auditor, the more you are able to spread tax savings over years. Because you have added value in terms of intangible assets to the company.

Burning expenses the very first year (opex) may lead to the situation that your taxes are low the first year but go sky-rocketing the following years. Capex will spread the tax savings over more than one year so you don’t run in oscillating budget and following effects. And if you do it right with more than one product, you may end up with tax savings.

Describe, Slice, Track & Report

You see? You should care about project and ticket descriptions, slicing tickets the right way (research, development, maintenance), (maybe) time track and report it understandable. Then your company is no longer only feeling effective but proofing it year over year via spread tax savings.

This is so simple, when you know the reason and the tools upfront, but difficult in retrospective. So, please, start speaking to your CFO, finance or controlling staff how to improve your way of dealing with capitalization. It does help them in the first place, but on the long run it will support you as a Agile Coach, Scrum Master or Product Owner.

You will get more support you need, because not only you, but the finance staff sees the value you are delivering to the company. You are now no longer opex which is the first ballast to get rid off in a storm.

And beyond

I hope I just blew you out of your comfort zone into start reading, asking and talking about capex. Find one of the following links interesting and worth reading:

  1. http://www.iasplus.com/en/standards/ias/ias38
  2. http://www.iasplus.com/en/standards/sic/sic-32
  3. http://www.infoq.com/articles/agile-capitalization
  4. http://itprojectfinancials.com/insights/2011/06/05/capitalizing-software-development-costs-from-sdcl-to-agile/