How IT Affects Your Company’s Financials
How does information technology impact a company’s financial statements?
The answer to this question is complex and multifaceted; IT has both direct and indirect business impacts on a company’s financials. Direct costs are those that can be traced directly to a ledger in the accounting system, whereas indirect costs affect a business process or cost, but the impact cannot be traced directly to a ledger in the accounting system.
Direct IT Examples
Here’s how IT can produce a direct impact on financial statements:
- New hardware and software assets are typically capitalized on the balance sheet and then depreciated on a monthly basis over the useful life of the asset. That cost represents an entry in the depreciation expense ledger each month. Depreciation expenses typically show up on the income statement as part of the general and administrative expense line item. An exception is when the assets are leased rather than purchased. In the case of an operating lease, the lease (or rental) payments are recorded directly as expenses and the purchase price of the asset doesn’t appear on the balance sheet.
- Hardware and software support contract costs are typically recorded in the period they’re incurred, which isn’t always when they’re paid. For instance, an annual contract can be purchased with one advance payment, but it will be expensed on a monthly basis on the financial statements.
- IT operational payroll costs are recorded as the costs are incurred and show up as monthly expenses on the income statement. In some cases, software development salaries are recorded as additions to a capitalized software asset, and then they’re later depreciated over the useful life of the internally-developed application after it’s been placed in service.
Indirect IT Example
IT might have an indirect impact when a company selling only to local customers opens up a new sales channel by creating an online store for its products. The IT costs associated with this type of project include:
- Development labor
- Web design labor
- Web hosting costs
- Backend database and application servers, etc.
While the direct IT costs of implementing the online store are captured in the accounting records, the financial benefits aren’t directly attributable to IT. For example, when the additional sales channel increases the revenues and profit of the company, it will be reflected on the income statement as revenues, costs of goods sold, and gross profit.
Why It Matters
It’s important for IT managers to understand how IT affects their organization’s financial statements so they can better prioritize initiatives, financially justify IT projects, and articulate the value of IT to non-technical decision makers.