Technology Finance

I. Description

Technology finance applies corporate financial principles for professionals engaged in the technology arena. It is important to be able to evaluate the financial strength of current and potential suppliers to ensure their ability to serve the needs of their customers. Internally, the technology professional needs to understand how to prepare operating and capital budget proposals to increase the likelihood of their approval within the framework of their organization's evaluation process. To be able to prepare capital budget proposals and perform other financial analyses, it is necessary to have a working knowledge of time value of money principles.

Leasing is an important method of financing technology equipment. Required competencies fall into six categories. It is essential to understand the language of lease agreements in order to ensure a negotiated agreement contains the rights, obligations and options required in a given equipment acquisition. How a lease is accounted for is often critical to whether equipment can be leased in the first place, which requires an understanding of accounting rules and how to achieve the desired result when applying those rules. In order to comply with a lease agreement's legal and tax issues, an understanding of sales and income taxes and appropriate sections of the Uniform Commercial Code is needed. Analytical tools essential to equipment leasing include lease versus lease analysis (financial comparison of leasing proposals) and lease versus purchase analysis. To competently execute these tools, an understanding of the time value of money is required as well.

II. Functions to be performed

1. Evaluate the financial viability of suppliers and lessors
2. Prepare capital and operating budget requests
3. Evaluate the profitability of capital investment proposals
4. Determine whether to pay for services up front or over time
5. Determine appropriate hurdle rates for investment proposals
6. Determining content of lease contract
7. Determining how assets should be procured (financing vehicle)
8. Payment schedules, terms
9. Document return arrangements upon expiration or termination of lease
10. Procuring leased products
11. Assure proper documentation upon delivery and receipt

III. Skills required

1. Analysis of financial statements
2. Analysis of a vendor's liquidity
3. Analysis of a vendor's leverage
4. Analysis of a vendor's profitability
5. Evaluate a vendor's financial condition using debt ratings
6. Analysis of a vendor using bench-marking and trend analysis
7. Making cash flow projections
8. Calculating measures of investment profitability
9. Performing discounted cash flow analyses
10. Cost analysis, lease versus buy
11. Cost analysis, comparing competing lease proposals
12. Time value of money expertise
13. Knowledge of contract law that covers leasing
14. Understanding of lease contract terms and conditions
15. Understanding lease accounting
16. Understanding income tax and sales/use tax and tax indemnification consequences of leasing and buying
17. Understanding Uniform Commercial Code provisions governing leasing (Article 2A) and loan (Article 9) transactions

IV. Instruction topics

1. Financial Evaluation of Vendors
• Analyzing financial statements
• Liquidity
• Activity
• Leverage
• Profitability
• Common size analysis
• Trend analysis
• Benchmarking
• Credit Analysis
• Services available
• Reading credit reports
• Limitations of information
• Other sources data
• Debt Ratings
• What they are/importance
• Moodys/Standard & Poors
• Other information sources
2. Capital Budgeting Issues
• The capital budgeting process
• Determining hurdle rates for capital projects
• Estimating cash flows
• Assessing project profitability
1. Payback
2. Net present value
3. Internal rate of return
4. Profitability index
3. Lease Contract Issues
• Commencement
• Rights
• Obligations
• Options
• Standard language
• The family of documents
• Governing language
• Defaults and remedies
• Insurance issues
• Casualty issues
• End of lease issues
4. Accounting Issues
• FAS 13 rules governing lease transactions
• Operating vs. capital lease—financial statement implications
• Strategies for obtaining operating lease treatment
5. Organizational issues
• Budgetary
• Operating budget
• Capital budget
• Policies/practices
1. No loss on disposition permitted
2. It still runs, doesn’t it?
3. Investing in vaporware
6. Tax Issues—Leases and Loans
• Sales and use taxes
• Property taxes
• Income tax consequences
• Tax indemnification issues
7. Uniform Commercial Code
• Article 2A—leases
• Article 9—secured loans
8. Lease vs. Lease Analysis
• Determining the appropriate discount rate
• How to compare the cost of competing lessor bids
• A base case analysis
• Present value cost comparisons
• Comparing bids using scenario analysis
• Base case cost
• Early out cost
• Renewal cost
• Purchase cost
• The final comparison
9. Lease vs. Purchase Analysis
• The goal of lease vs. purchase analysis
• The framework for analysis
• Identifying relevant cash flows
• Determining the appropriate discount rate
• Estimating the cost of ownership
• Estimating the cost of leasing
• Technology incremental costs to consider
• A final analysis
10. Time Value of Money—The Science of Making Values Comparable
• Future values
• Present values
• Annuities
• Periodicity
• Quarterly
• Monthly
• The appropriate discount rate
• Debt rate
• Incremental cost
• Weighted average cost of capital
• Applications
• Lump sum payments vs. monthly payments—which is cheaper?
• Comparing the cost of competing lease proposals
• Comparing the cost of payments in advance or arrears
• Comparing the cost of paying a termination value vs. the present value of remaining rents