How to stay in business

The ABC ran a documentary about merging a few small businesses into a
larger organisation. At first everything seemed to be progressing well
until they started to talk about money. I haven’t seen all the episodes
but the final episode showed that Buzzle (as the business was called)
didn’t make it. The company was losing money and had cash-flow
problems. Within 6 months after the grand opening, the company closed
its doors again.

From media reports during the last few months it seems that more
businesses are going broke than ever before. And it ‘s not just the
small companies; also the really large organisations don’t survive.
Think about HIH and One-Tel. It seems as if the current economic
instability and uncertainties are separating the chaff from the wheat.
The key to survival is healthy cash-flow management. You need to know
your costs and expenses and need to link this to the income stream in
such a way that –no matter what- you can always pay your bills.

When I talk with organisations about implementing ITIL® Service
Management, more often than not, people want to skip Financial
Management for IT Services. Especially the concept of charging internal
clients for IT services. This appears to be a difficult issue. And it
is so important!

Financial Management is much more than charging alone, it consists of the following activities:

  •      IT Accounting
  •      Budgeting
  •      Charging

IT accounting is all about having insight into the cost associated with
delivering IT services to the business and internal clients. It creates
awareness amongst business staff and IT staff and decreases the
unnecessary expenditure within the IT department. Mind you, IT
accounting is more than adding up the cost for buying and maintaining
hardware and software, it also covers the indirect costs like
office-space and other overheads.

Budgeting is an exercise that can be done in several ways:

  • Zero budgeting: start with a clean slate every time you need to prepare a budget. You will have to defend the budget completely
  • Incremental budgeting: use the figures of last year to build your new budget
  • Combine the two, e.g. use zero based for projects and incremental for ongoing maintenance

When you have these two activities implemented into your organisation,
you can always decide if and how you are going to charge your costs
back to your clients.

Even if you don’t charge your clients for your services, it provides
you with valuable information about your business and helps you to make
a cash-flow projection. We already know how important that is.

Until next time: watch your costs and stay in business!