A common language around FinOps is key to successful interactions. The meaning of the words, motivations, and views differ across leadership, finance, and engineers. I explain this in detail in my course titled "Cloud Financial Management — Beyond Just Optimization". In this section, we are going to describe some of the important terms around cloud forecasting.

Forecasting.

Let's start with what is forecasting. Forecasting is the projection of financial trends that can change as new data becomes available. The goal is to help the business anticipate results and forecasts can also be used to create budgets.

Budgeting.

This brings us to budgeting. Budgeting is an estimate of revenues and expenses a business plans to spend within a time period. This allows business owners to continuously track actual spend against their budgets.

Cost estimation.

Cost estimation is the process of quantifying resources that will be required to complete a project. This is useful for workloads that don't exist yet but are planned to be created in the future. Cost estimation can also be used to create budgets.

Cost of goods sold (COGS).

The Cost of goods sold or COGS measures expenses directly responsible for revenue in the month they occurred. It is important that these expenses have no future benefit. For a business using cloud, COGS usually are the monthly cloud bill and the cost of sales and support staff.

COGS can become capitalized assets.

COGS can be reclassified as capital expenses when the expenses are not directly responsible for revenue in the month they occurred. Cloud costs not contributing to revenue within a month can be capitalized as assets. When these assets contribute to revenue they must be accounted as COGS during the month of contribution.

Capitalized expense (CapEx) versus operational expense (OpEx).

Capitalized expense or CapEx for short versus operational expense or OpEx. When you capitalize something, it becomes an asset of the company. This is independent of the month when it is expensed. For example when you pay for something that has future benefits the expense can be capitalized. If the payment has no future benefit it is an operational expense.

Unblended rates.

What are Unblended rates? Some resources are charged in decreasing rates the more you use them. This means you are billed different rates for resources as you use more, or for a longer time during the month. By examining your bill, you can see that some resource costs are larger than others, even for the same type of resource or an identical resource. When the rates are presented this way, they are called unblended.

Amortized costs.

What are Amortized costs? Some cloud resources and reservations come with an upfront fee. The amortized cost of a resource takes this initial payment into account and distributes it out based on usage, attributing the prorated cost for each hour of billing.

Fully loaded costs.

What are Fully loaded costs? Fully loaded costs are amortized, reflect the actual discounted rates a company is paying for cloud resources, equitably factor in shared costs, and are mapped to the business’s organizational structure. In essence, they show the actual costs of your cloud and what is driving them.

Cost allocation.

What is Cost allocation? The process of splitting up a cloud bill and associating the costs to each cost center. It is important to have teams understand how costs are being allocated, and to have a centralized, controlled, and consistent cost allocation strategy.

To summarize Relevant Terms and Concepts, a forecast is a financial projection that can be assigned as a budget to a business owner. Cloud costs can be expressed in different contexts such as unblended, amortized, and fully loaded costs. And some cloud costs may be capitalized under specific conditions.