Banking

Finance your way to financial equilibrium

Many organizations are looking for projects with quick payback. By creatively leveraging borrowing (either through a loan or leasing), you can undertake these kinds of projects without impacting cash flow or budget and begin to immediately realize the benefits. Benny Sisko talks about one way he's financing a small project that will have a positive net impact.

Although I lump banks and leasing companies into a single pool in this posting, there are, of course, differences between your typical operating leases and loans from a bank. On the other hand, when you move into capital lease territory, the differences between the lease and a bank loan start to erode. The purpose of this article is not to debate operating vs. capital leases, but to discover ways by which you might achieve some budgetary savings.

The credit crunch has taken its toll on budgets everywhere. However, even with the credit crunch, there are still banks and leasing companies out there willing to help organizations meet their goals.  In fact, you might find a financing or leasing partner that is able to help you trim your IT budget while still meeting critical organizational goals.

Most CIOs that I know have a list of things that need to be done; some list items are large projects and some are small projects.  In the current economic climate, a "savings" project that does not have a very quick (less than 12 months) return can be difficult to fund, even if the multiyear benefits are significant. Cash is king right now and, as a result, cash flow is king.

At the college where I work, we have one small item that is a major nuisance and that has become a significant expense - DSL connections to our residential houses. The college owns and operates a number of traditional dormitories, which are connected to the campus by fiber optic backbone, but we also have a number of houses that have been purchased over the years. A few years ago, my predecessor did a cost analysis and determined that adding these facilities to the campus network did not make financial sense. As a result, we now have residential phone service and DSL in these residences. The annual bill approaches $12,000 for this service. On top of that, the students remain pretty unsatisfied with the DSL service as we've experienced quite a number of problems.

In a perfect world, we'd simply add those houses to the fiber backbone and provide each house with network connectivity, wireless service, and IP phone service, as we've done for our dorms.  The cost to pull this off is about $30,000. Given other college financial priorities at present, I can't ask for $30,000 right now to undertake this project, but it is something I consider important from both a service and expense perspective.

My solution: We will do the project now by borrowing $30,000 and making three annual payments that will probably equal what we were spending on the phone and DSL service. The end result will be a total expenditure of no more than $36,000 (after interest) as opposed to ongoing costs of $12,000 annually.  We will also end up with a much better, more supportable solution than we have right now, which means happier students. Happier students tend to stay at the college.

It's a win almost any way you look at it. Of course, for three years, this does show up on the balance sheet as a liability.

Obviously, there are limits to this approach. As I mentioned at the beginning, credit is still tight in many places, so this might not work for everyone or for every project. However, by creatively leveraging existing budget dollars, organizations can continue to improve services and ultimately reduce unnecessary expenses while cash flow stays consistent and the budget stays flat.

It goes without saying that this solution requires close coordination with the CFO. I'm fortunate in that I have a very good relationship with my CFO and he's very supportive of these kinds of techniques.

About

Since 1994, Scott Lowe has been providing technology solutions to a variety of organizations. After spending 10 years in multiple CIO roles, Scott is now an independent consultant, blogger, author, owner of The 1610 Group, and a Senior IT Executive w...

1 comments
lodestone
lodestone

. . .tap your alumnae or capitalize (literally) on community support. Small, targeted capital campaigns can be quite successful even in such tight times. Look to successful recent grads, especially in tech, to pitch in for a "cool project." People tend to be a bit more willing to fund a designated project than they are the annual nebulous pitch to "help your alma mater." Another avenue is grants (corporate or otherwise). Education technology grants are quite common. Much grant capital goes unclaimed every year. Regardless whether it currently looks doable, borrowing is still presuming on an unstable future. It is a truism that no one has ever borrowed their way to prosperity. --Allen