6 things all tech leaders should know about business finance

Understanding financial reports and knowing how to assess projects from a financial perspective can help you get ahead in your career. Here are some other key parts of finance you should know about.

I once was an IT director at a manufacturing company where the CEO liked to gather managers and ask them off-the-cuff questions in staff meetings about industry financial ratios and what they meant, and also about the various elements on the company's quarterly financial statements.

As a non-financial manager, the exercise made me nervous. What if the CEO called on me in the meeting and I didn't know an answer?

From the CEO's perspective, this financial Q&A was sensible. He expected all of his managers, including the non-financial ones, to be on top of the company's financials, because the dollars flowing through the company were the lifeblood that made it go.

He was right to expect this.

To take it one step further, anyone aspiring to move up within a company, should learn about finance, in addition to the various other business operations within the company and how they fit together.

If you're an IT leader without much financial background, and you aspire to the organization's top position, here are six things you should learn:

1. How to read and understand the company's income and balance sheets

Each quarter, finance departments issue a balance sheet that states corporate assets and liabilities, balances them against each other, and comes up with a final "book value" for the company and its shareholders. Finance departments also also produce income sheets that describe the activities of these assets and liabilities in greater detail and breaks down how the company earned its revenues and how it spent its money. In tandem, the corporate balance sheet and income statement constitute a health checkup of the company.

You should aim to understand these reports, and their implications, well enough to explain them. For example, if revenues are down or if your new data center is costing more than expected, it's probably not a good time to recommend the purchase of additional HVAC equipment.

SEE: Hiring kit: IT finance manager/budget director (TechRepublic)

2. Key financial industry ratios that the company measures itself against

Industry ratios are used by many companies as a way to benchmark themselves against others in their industry. By comparing your company against other companies in your industry, you can gain insights into how well your company is competing in its markets. By tracking these ratios, you can also gain advance insight for your budget planning process. If the company is performing well in comparison to competition, you might propose aggressive projects. If performance is down, it might be more prudent to hold the line on expenses.

3. The dynamics and composition of company revenue and cost streams

Are revenues increasing because of a new market area that has opened up? It might be warranted to extend IT capabilities to the sales force in this area. Are costs rising rapidly in the company's call center? It might be time to analyze the business processes and the technology supporting those processes to see if they are outdated. In many cases, by seeing where the revenue opportunities are and where the costs are bleeding the bottom line, IT managers and CIOs can make sound decisions on future IT investments that rapidly pay off for the company.

SEE: Tech budgets 2018: A CXO's guide (free PDF) (ZDNet/TechRepublic special report)

4. How to prepare IT budgets like a CFO

Whenever you prepare an IT budget that contains new and continuing projects, staff and other resources and fixed assets, look at each line item from a financial payback perspective as well as from the technology and operational benefits it is delivering. One reason you should do this is that it is likely to be the CFO who raises the loudest voice when it comes to cutting budgets. By understanding that point of view, you will be more ready to argue with it if you have to—or to appreciate it if it makes sense.

5. How to assess IT's financial performance

There are many aspects of day-to-day IT performance that should be looked at financially, even though the CFO or the budget process might never demand that you do. How well are your projects being run? Do you have people who are just doing busy work because there isn't a new project for them to be plugged into right away? How can they better be utilized? What about your storage and processing? Do you have servers or disk drives that are only 20% capacitized? Is there a reason for this—or is staff just too busy to optimize them? Looking at IT performance from a financial, as well as an operational, perspective can provide a lot of helpful information.

SEE: IT budgeting: The smart person's guide (TechRepublic)

6. How to look at IT projects for other business areas from a financial perspective

All too often, IT moves away from projects once they're implemented, only revisiting them for purposes of day-to-day support. The post-mortem for completed projects focuses on technical difficulties that unexpectedly arose—and how to make sure that they don't happen again in future projects. Just as important, however, are the longer-term financial benefits. Did the project reduce costs as anticipated? Did it contribute to company revenues? What does the payback look like after the first full year in operation? These are all questions IT leaders should be asking.

"Work used to be much more hierarchical, and in many instances rote," Gary Pinkus, McKinsey & Company's managing partner for North America, said in a 2016 New York Times article. "You could build a nice career within any particular function by taking on more responsibility within that specialty. But if you look at most companies now, work has become incredibly cross-functional."

Because work is cross-functional, with many new job titles representing hybrid positions, anyone who aspires to move up in a company should learn different business functions and operations within a company and how they all fit together.

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About Mary Shacklett

Mary E. Shacklett is president of Transworld Data, a technology research and market development firm. Prior to founding the company, Mary was Senior Vice President of Marketing and Technology at TCCU, Inc., a financial services firm; Vice President o...

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