How Proper Classification of IT Costs Can Save a Project in Hard Times
In the times of crisis, economic downturn or just temporary problems on the market, many companies, especially the smaller ones, are struggling financially. One of the challenges is reaching the assumed financial target while facing lower revenues, which usually means strong pressure to cut costs. Very often, in such situations, companies decide to cut budgets planned for digital transformation projects. Is this the right decision? How should CIOs handle those problems? What arguments should be presented to the decision-makers for the projects to be continued?
Answering those questions by people responsible for digital transformation is vital especially now, when the entire globe is trying to tackle the SARS_CoV-2 virus.
If you are in the process of digital transformation, which in the long run – thanks to introducing innovative digital solutions — will cut costs or generate extra revenue, you should do everything to finalize the projects as soon as possible and start enjoying the benefits they brought. Many of those projects are realized by internal teams or mixed teams (internal employees and contractors). Remunerations of the contractors and most of the internal employees are treated as costs or so-called Opex (operating expenditures). Such costs are definitely influencing the financial results of a given month. We can capitalize those costs just to minimize them within the entire year and spread them for a longer period.
The Accounting Act allows for capitalization of outsourcing costs incurred while creating non-material and legal value. This means, such costs are treated as an investment — so-called Capex (Capital Expenditures). Making that move lets us amortize such non-material and legal value, thus spreading the expenditure for a longer period. Therefore, if the project lasts 12 months and 100% of the contractors outsourcing costs negatively influence the financial result of your company, change the classification of the particular costs to investment and spread the costs for a longer period, such as 5 years. The amortization, which will negatively influence the financial result within a given year, will constitute for only 20% of the costs incurred.
In the times, when more and more often companies use cloud solutions (thus cutting investment costs and turning them into operation costs), negative influence budgets planned for IT have on yearly financial results is considerable. Migration to cloud solutions is a very good, important, and expected move as a part of digital transformation. As we can see today, companies using cloud solutions in the times of remote work and quarantine, are handling the situation much better than the ones which don’t.
However, the consequence of using cloud solutions is classifying their costs as Opex — which means 100% of the expenses negatively influence the yearly financial result when it comes to costs. Very often, the only budget allocation, which can be capitalized and then amortized, are the costs of outsourcing services incurred while realizing software development projects. Changing the Opex classification to Capex lets us start projects important for the development of our business or continue the projects which are already in progress. Implementing new solutions will bring more revenue and optimize costs.
Among many other reasons why outsourcing can be beneficial for your business, this is the most important one.
