3 Financial Terms That IT Managers Need To Know

by drjim on December 6, 2012

In the end, it's all about the money…

In the end, it’s all about the money…
Image Credit

What makes an IT manager successful? In a word it’s communication. The IT managers who are able to successfully reach out and talk with the rest of the business using terms that they use every day are the ones who will be able to get more things done with their IT dream team and get them done quicker. In order for you to be considered to be a successful IT manager, you are going to have to boost your vocabulary by learning and understanding what the following three financial terms mean.

Fixed Costs

Your company makes something. It can be a real physical product – something that you can touch and feel. Or perhaps it is a service. No matter, in creating the “thing” that your company sells, there are all sorts of costs associated with making each unit of it. One such type of cost is called the “fixed costs”.

These are the types of costs that are going to stay pretty much the same no matter how many units of your company’s product get manufactured. These costs can include such things as rent or lease payments, insurance, and salaries. As an example: the amount of rent that the company has to pay will remain the same no matter if the company makes one unit or 100,000 units.

Variable Costs

Variable costs are where things start to get interesting. IT managers will often hear their leadership talking about company plans that are designed to find ways to manage or reduce variable costs throughout the company.

Variable costs are the costs that will change based on the number of units that the company decides to produce and sell. Good examples of variable costs can include labor costs, raw material costs, and the cost of utilities. It all comes down to one simple fact: the more units that the company makes, the more of these items it will consume.

Contribution Margin

All of those costs have to be paid for somehow. Ultimately it comes down to creating products and selling those products in order to make enough money for the company to pay off its fixed and variable costs.

The contribution margin tells the company how much of its fixed costs are going to be paid off by selling each unit. Here’s how contribution margin is defined:

net unit revenue – variable costs per unit

What All Of This Means For You

In the world of IT in which we all live in, it can be very easy to slide into just having discussions with our fellow IT workers using the IT vocabulary that seems to be almost second-nature to us. We need to take the time and the effort to learn how best to communicate with the rest of the company using the terms that they use every day.

A great place to start leaning what terms to use is to master the use of fixed costs, variable costs, and contribution margin. These three terms all relate to the costs that the company faces when it creates each individual unit of product that it hopes to sell. When the company has to make decisions about what it wants to do next, these are the terms that it uses to consider its options.

As an IT manager, if you both know what these terms mean and if you are comfortable using them, then you’ll be ready to participate in the company’s important management planning discussions. You have a lot of IT knowledge that the company needs, make sure that you also have the vocabulary so that you can share what you know with the rest of the company…!

- Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World IT Management Skills™

Question For You: What role do you think that IT could have in helping the company to calculate its contribution margins?

Click here to get automatic updates when The Accidental IT Leader Blog is updated.

P.S.: Free subscriptions to The Accidental IT Leader Newsletter are now available. Learn what you need to know to do the job. Subscribe now: Click Here!

What We’ll Be Talking About Next Time

As an IT manager, we like to think of ourselves as being far, far away from the business side of the house. However, the reality is that the reason that we have a job is because the products and services that our IT teams help the company to build get sold. This means that you’re going to need to have to show some leadership and have a good understanding of what the difference between a successful and an unsuccessful product is.

{ 0 comments… add one now }

Leave a Comment

Previous post:

Next post: