Wednesday, 24 August 2016

Financial Management for IT services

software development companies

Financial management for IT services: 

Financial management is a complex, specialized area orprocess by which IT service providers in india, in software development companies,can calculate, forecast and track costs and income related to IT services. Financial management should be managed and performed by skilled and trained professionals, even within the IT environment.


The purpose of Financial management for IT services focuses on reaching the acceptable level of funding to design, develop and deliver the IT services that meet the goals and strategy of the IT organization. At the same time financial management for IT services is a gatekeeper that makes sure that the IT service provider does not commit to services that they are unable to provide. Financial management for IT services maintains the level of supply and demand between the service provider and their customers by balancing the cost and quality of service.

The objectives of Financial management for IT services are as follows:

  • To define and maintain a framework to identify, manage and communicate the cost of providing various IT services.
  • To evaluate the financial impact of new or existing or changed strategies on the service provider.
  • To manage the provision of IT services by securing funding.
  • To facilitate good stewardship of service and customer assets, together with amalgamation of service asset and configuration management and knowledge management, to ensure the organization meets its objectives.
  • To understand the relationship between expenses and income and ensuring that both are balanced according to the organization’s financial policies.
  • To managing and report expenditure on different types of IT service provision.
  • To execute the financial policies and practices in the provision of services.
  • To account for money spent on the creation, delivery and support of services.
  • To forecast the financial requirements for the IT organization to be able to meet its commitments to its customers, and compliance with regulatory and legislative requirements.
  • To define a framework to recover the costs of service provision from the customer.

Financial management mainly comprises of three main processes:

This is the process of forecasting and supervising the income and expenditure of money within the organization. Budgeting also consists of a periodic negotiation cycle for setting the annual budgets and the monthly monitoring of the current budgets.

This is the process that guides the IT organization to account the way its money is invested or used. It includes accounting systems, including ledgers, balance sheets, journals etc. and should be reviewed by trained entity in accountancy.

Types of accounting methods include: 

  • Direct cost vs. indirect cost 
  • Capital cost vs. operational cost
  • Fixed cost vs. variable cost 
  • Cost types
  • Cost elements
  • Cost unit
  • Charging

This is the process used to bill customers for the services which are supplied to them. This requires sound knowledge of IT accounting practices and systems.

There are several charging policies (pricing):
• Cost price
Recovery of costs associated with provision of services
• Cost price +
Cost price + a percentage markup value
• Going rate
Deriving charge based on other department’s charges
• Market price
Price charged by a third party provider
• Fixed price
Agreed price independent of actual usage of IT services

IT organizations are increasingly using financial management to assist in the pursuit of:

  • Enhanced decision-making
  • Speed of change
  • Service portfolio management
  • Financial compliance and control
  • Operational control
  • Value capture and creation.

An understanding of the cost of IT services to each business unit will allow IT service providers to recover the costs through their services and maintain profitability. Better matching of IT services to business outcomes results in more appropriate and controllable spending models, and more predictable profitability. Thus, each IT service organization in india should have a detailed understanding regarding the Financial management and proper implementation of it.

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