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Advanced KPIs reflecting unit’s financial health; KPIs impacting public companies' financial statements

Capitalization Rate

The percentage of total development time that is capitalized as opposed to expensed. This is crucial for understanding how much of the development cost is considered an investment. More about development time capitalization in https://wmdemo.atlassian.net/wiki/spaces/TC

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titleHow to calculate Time Capitalization Rate

The Capitalization Rate measures the proportion of software development costs that are capitalized rather than expensed. This is important for understanding how much of the software development effort is considered a long-term investment.

How to Calculate:

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  • Capitalized Development Hours: The number of hours spent on development activities that are capitalized. This usually includes time spent on developing new features or software that will provide benefits beyond the current accounting period.

  • Total Development Hours: The total number of hours spent on all development activities, whether they are capitalized or expensed.

Example:

If a team spent 400 hours on a project, and 300 of those hours were spent on activities that could be capitalized, then the Capitalization Rate would be (300/400)×100=75(300/400)×100=75.

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titleCapitalization Rate Improvement Strategies

  1. Prioritize Long-Term Projects: Focus on projects that yield long-term benefits. This might mean developing new features or platforms that will serve the company for several years rather than short-term fixes.

  2. Training & Development: Ensure that the development team is well-trained in identifying tasks that qualify for capitalization. This can be achieved through regular workshops or training sessions.

  3. Documentation: Maintain thorough documentation of development activities. This not only aids in the capitalization process but also ensures compliance during audits.

  4. Collaboration with Finance: Foster a close working relationship between the development and finance teams. This ensures that there's a mutual understanding of which activities can be capitalized.

ROI of Software Development

Measures the return on investment for software development asset or its part: product, version, extension, feature, etc. This KPIs is central for application portfolio management.

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titleHow to calculate ROI of software development

Return on Investment (ROI) for software development measures the financial returns generated by the capitalized software development costs. It helps in assessing the effectiveness of the investment in software development.

How to Calculate:

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  • Net Profit from Software: The net profit generated from the software, usually measured over a specific period after the software has been deployed.

  • Total Capitalized Cost: The total cost that has been capitalized for the software development project.

Example:

If the net profit from the software is $200,000 and the total capitalized cost was $50,000, then the ROI would be (200,000/50,000)×100=400(200,000/50,000)×100=400.

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titleImprovement Strategies for SWDev ROI

  1. Market Research: Before embarking on major projects, conduct thorough market research to ensure that there's a demand for the features or products being developed.

  2. Feedback Loops: Implement feedback loops with customers to ensure that the software being developed aligns with their needs and can generate revenue.

  3. Cost Management: Regularly review and optimize development processes to reduce unnecessary costs. This could involve adopting more efficient development methodologies or tools.

  4. Monetization Strategies: Explore various monetization strategies for the software, such as subscription models, licensing, or pay-per-use, to maximize revenue.

Amortization Schedule

For capitalized software, understanding the rate at which the software asset will be amortized. The lifetime value of an asset is extended through developing additional features and enhancing existing functionalities.

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titleHow to calculate software amortization schedule / lifetime

The Amortization Schedule outlines how the capitalized software asset will be expensed over its useful life. This helps in financial planning and understanding the long-term financial impact of the software asset.

How to Calculate:

Amortization is usually calculated using the straight-line method, where the capitalized cost is evenly distributed over the useful life of the asset.

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  • Total Capitalized Cost: The total cost that has been capitalized for the software development project.

  • Useful Life in Years: The estimated number of years the software will provide economic benefits.

Example:

If the total capitalized cost is $50,000 and the useful life is estimated to be 5 years, then the annual amortization expense would be 50,000 / 5 = $10,000.

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titleImprovement Strategies for Amortization schedule

1. Feature Enhancement: Add new features that align with emerging user preferences and trends, such as AI-driven analytics or real-time translation services for products.

2. Security Updates: Regularly update security protocols and encryption methods for products

3. User Experience (UX) Improvements: Conduct usability studies to identify areas for improvement in the user interface of their cloud-based dashboard and other customer-facing tools.

4. Integration Capabilities: Develop plugins or APIs that allow products to integrate more seamlessly with popular solutions from 3rd party vendors (e.g. in Enterprise software - with CRM, ERP, Accounting software)

5. Performance Optimization: Regularly update the backend algorithms and data processing methods to speed up services.

6. Scalability Features: Add features that allow for easy scaling of services, such as auto-scaling capabilities or tiered pricing models based on usage.

Self-sustainability of Development Department

Financial metric that gauges the ability of a software development department to support its operations, growth, and innovation through effective financial management and resource utilization. It's an indicator of how well the department can generate value and maintain its functions without requiring additional financial support.
Target example: total revenue from software equals at least double of total FTEs' salaries + bonuses

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titleComponents of Metric

  1. Cost Efficiency: The ability to minimize unnecessary expenses while maintaining quality and productivity.

  2. Budget Adherence: The degree to which the department sticks to its allocated budget while achieving its goals.

  3. Capital Investment Returns: The returns generated from investments in tools, technologies, and training.

  4. Revenue Contribution: The direct and indirect revenue generated by the department's projects and innovations.

  5. Resource Optimization: Effective allocation and utilization of financial resources.

To quantify the "Self-sustainability of the Development Department" from a financial perspective, a composite index can be created, combining several relevant financial metrics. Here's a formula that incorporates the key components above:

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