Scope and Applications of Financial Management in IT services

Financial Management refers to application of general managerial principles in the area of decision making. It is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for smooth operations.

Budgeting refers to making a detailed financial plan that quantifies future expectations and actions relative to using existing resources and acquiring new resources. Budgeting can take various forms and can provide the basis for setting up detailed sales targets, staffing plans, inventory production, cash management, borrowings, capital expenditure and more. Budgeting provides benchmark to compare actual results and to accordingly develop the corrective measures.

Scope of financial management includes the following:

• Economic concepts (such as macro and micro economics, economic order quantity, money value discounting factor and more) are directly applied with the financial management approaches.
• Accounting plays a critical role in management decision making and in financial management.
• Financial management applies large number of mathematical and statistical tools and concepts (also known as econometric).
• Production management is the operational aspect of decision making requiring the support of financial management.
• Financial management/finance department allocates resources for marketing and related activities that play a crucial role in a firm’s marketing budget.
• Financial management is related to human resource department, which provides manpower to all the functional areas of management.

 
For an IT services organization, financial management’s goal is to maximize the return from the amount spent on IT services and to provide management a detailed cost–benefit analysis of providing various IT services. The sub-processed of financial management for IT services include:

1. Budgeting:
   • Detailed budgeting for IT services enables the company to allocate resources and to reduce redundant costs in IT expenditure. Furthermore, it helps organizations to compare actual IT expenditure with the estimated expenditure to fine tune the process of estimation in the organization.
   • The brief process of budgeting include:

2. IT Accounting:
   • IT accounting refers to accounting of the amount spent for providing IT services. It helps organizations to a great extent on cost saving by analyzing the efficiency of IT service provisions.
   • The cost elements in which IT accounting can be used to rationalize cost include fixed cost, variable cost, direct cost, indirect cost, capital cost, operational cost and so on.

3. IT Chargeback:
   • IT chargeback is the process used by financial department in IT industry to allocate the costs associated with various departments.
   • IT chargeback helps departments in reducing their overheads and make them responsible for meeting any unusual demand from constraints budget.
   • The process is typically complex, including various sub-processes, to ensure                whether the allocation of cost is accurate to each department backed by a simple and fair charging policy or not.

 
Several Processes that provide the required information to financial management process include:

• Service Level Management provides information about the level of service required to be given to a customer.
• Configuration Management Database (CMDB) provides and stores information related to all components of an information system. CMDB helps companies to track the configuration of components and the relationship between the components.
• Capacity Management refers to planning and estimating the capacity requirement of the company. The capacity requirement estimation ultimately leads to cost estimation.
• Change Management is the process of estimation of cost for any unforeseen changes and analysis of cost on a regular basis.

 
Ultimate objective of financial management is enhancing the shareholder value. The process ensures adequate financial planning, acquisition of funds, proper fund allocation, financial decisions, increasing margins and ultimately improving value of the firm. Financial management is an essential part of economic and non-economic activities that decide the efficient utilization and procurement of funds.