2.3 Cost vs Investment

Now we are getting to a point you might want to consult your accounting department or your financial controler; a discussion about cost versus investments of software and related items. I will describe the subject as a understand it. A financial genius will provide you perhaps with a more detailed, more correct story. I will tell you just enough in simple terms.

Every cost item can be treated in the books in two ways: as cost, then the amount of money spent on the item is booked directly in the period you actually purchase it; or as an investment, then the total cost will be spread over a larger period in the accounting logs.

If I let someone install a server this week, and the vendor will charge me $1000 for it, if you look in the financial schedule for this week, you will see directly my 1000 bucks. If I buy also this week 30 software licenses, which cost me $3000, the accounting department can book $1000 this week, $1000 for next year, and another thousand the year after that.

Typically things that will be used over a longer period (couple of years) can be treated as an investment. So the server itself can be regarded as an investment; the installation is definitely cost. But like I said, your financial whiz -kids can fill you in on this one.

Why is this important? Well, departments typically work based on budgets. If they have a budget for this year, that doesn't mean all the cost for a new software system will be subtracted from this years budget. By taking into account the investments, management can see how the new system will influence their current budget, and the ones in the years to come.

The following questions should be answered by your financial man or woman:

• What is the write-off period (over how many years can we spread the cost?)
• And what are the write-off percentages for each year (perhaps you don't spread the costs equally over all the years)?

To summarize, consider the following example: a $3000 server is an investment. The write-off period is 3 years, and the percentages are 40-20-40. In the end your spreadsheet would like something like this…

Item	2002	2003	2004	Total
Server	$1200	$600	$1200	$3000