Transcript “Speak CFO in 1 Easy Relatively Not too Complicated Step” What project managers need to know about software capitalization Stacy Taylor President [email protected].

“Speak CFO in 1 Easy Relatively
Not too Complicated Step”
What project managers need to know about software capitalization
Stacy Taylor
President
[email protected]
Stacy Taylor
President,
Red Mountain Services
• Software Developer turned Project
Manager turned Executive
• Loves project management and
cupcakes
What a Project Manager Says
• I’m going to lead a team of highly skilled subject
matter experts to develop a new software system
that should reduce our operating costs in 3 to 5
years
What CFOs Hear
• I’m going to spend lots of money on something
with somewhat questionable ROI and report
statuses to you in % complete resulting in
completely unusable data for financials and
forecasting
How CFOs think
• What does my company look like to
shareholders?
• What are the management goals of my company
and how can I support that through my financial
accounting?
Capitalization vs. Expense
Initially
Later Years
Ratio
Capitalizing
Expensing
Capitalizing
Expensing
Net Income
Higher
Lower
Lower
Higher
Stockholder
equity
Higher
Lower
Lower
Higher
Total Assets
Higher
Lower
Higher
Lower
ROA (Return
on Assets)
Higher
Lower
Lower
Higher
ROE (Return
in Equity)
Higher
Lower
Lower
Higher
Capitalizing costs are an important part of how the company is
perceived now and in the future
Cupcake Capitalism!
Finally, our 100,000 calorie
Cupcakes are ready to sell.
How do I get them to
customers?
Business Problem Solved! Accounting
Problem Begins!
$50,000 Delivery Truck
$5,000 in Gas
$20,000 in Earnings
Expensed:
Business is $35,000 worse
off. ($20,000 -$55,000)
Capitalized:
Gas is gone (Expense)
Truck has value into future
(depreciating)
Earnings are the same
Business is $5,000 better
($20,000-$5,000-$10,000)
Cupcake Ordering Application
$500,000 Development Cost
$100,000 in Hardware Costs
$ 50,000 Software licenses
$ 20,000 in Travel
Expensed:
???
Capitalized:
???
If time and effort was
not tracked adequately, the
business misses out on
opportunity to capitalize
What a Project Manager Needs
• Understanding of
capitalization policy
• Is it incorporated
into methodology or
is project manager
responsible for
delivering data
needed to support
it?
Phase Analysis
Evaluation
• If project ended here, no asset
Software
Development
• End result is
“significant”
asset
Post
Production
Capitalizing
Possible
• Maintenance
not
“significant”
Capitalization Policies are Invented
and Can Change
• Usually a dollar amount threshold to make it
worth the time and effort
• Example:
▫ $200,000 or more upgrade or new development
▫ Development and Testing but not Design hours
are capitalized
▫ All travel is expensed
▫ All hardware and software over $10,000 is
capitalized
Cupcake Ordering Application
$500,000 Development Cost
$100,000 in Hardware Costs
$ 50,000 Software licenses
$ 20,000 in Travel
Expensed:
$20,000 Travel
??? Development
Capitalized:
$100,000 hardware
$ 50,000 software
??? Development
The Project Manager needs to
understand how to track effort
and costs
Waterfall
Requirements
Design
Expensed
Code
Integration
Capitalized
Test
Maintenance
Expensed
Cupcake Ordering Application
$500,000 Development Cost
$100,000 in Hardware Costs
$ 50,000 Software licenses
$ 20,000 in Travel
Expensed:
$20,000 Travel
$150,000 Design and Training
Capitalized:
$100,000 hardware
$ 50,000 software
$ 350,000 Code and Test
If time and effort was
not tracked adequately, the
business misses out on
opportunity to capitalize
What about Agile?
Backlog
Asset
Feature
Requests
Features
3 Approaches
• Capitalization by % of Agile Release Train Costs
• Capitalization by Story Points
• Capitalization by Task Hours
% of ART Costs
Capacity Allocation
Maintenance
Architecture
New Business Features
Management
Story Points
• Determine Capitalizable Stories (must have
business case and implement features)
• Use burn down charts and story points
• Accounting calculates an average cost per story
point
Capitalization by Task Hours
Story 29: Add cupcake icon with hyperlink to pros of frosting for health
Task
Description
Resource
Estimated
Actual
29.6
Final icon
design
David
2
2
29.7
Hyperlink to
new article
Karen
3
1
29.9
Test link
Jonas
2
5
7
8
Total
Cupcake Ordering Application
$500,000 Development Cost
$100,000 in Hardware Costs
$ 50,000 Software licenses
$ 20,000 in Travel
Expensed:
$20,000 Travel
$150,000 Design and Training
Capitalized:
$100,000 hardware
$ 50,000 software
$ 350,000 Code and Test
Good reporting on Agile efforts
improves financial insight
Ready for Anything
More Information
Stacy Taylor
[email protected]