We are now getting to the last part of our terminology section, Now with terms from the finance and accounting world. And we're starting with amortization. This means retiring a payment of capital gradually over time on a schedule which reflects the benefits the capital provides in each period. Like depreciation, amortization typically applies to the retirement of cash payments, where depreciation tends to apply to physical capital equipment. An upfront RI payment can be amortized over the usual lifetime (1 or 3 years) of the RI itself.

 

Variable Costs are costs that varies according to the business volume it supports. A company hosting websites would need to pay for more computers to host more websites, and so that cost per website is a variable cost.

 

Upfront Charges for Reserved instances or savings plans. Reserved instances or service reservations, in general, can typically be purchased with a full upfront payment (All Upfront), a partial upfront payment plus a reduced periodic charge (Partial-upfront), or with no upfront charge (No-Upfront). The upfront charge may be amortized over the life of the RI. Upfront charges might be treated as Prepaid Expenses on the Balance Sheet but check this with your accountants!

 

Opex or Operating Expenditure is a category of business expense made in a specific accounting period which provide benefits only in that accounting period. Purchasing on demand cloud services is considered an Operating Expenditure. Operating expenditures require no long-term tracking of depreciation or amortization but are subtracted from earnings in the period incurred.

 

ROI - Return on Investment is the amount of profit from an investment made, usually expressed as a percentage of the original total cost invested. In a cloud rightsizing business case, the ROI might be calculated as the savings in cloud expenditure expected less the engineering and other costs required to take the rightsizing action.

 

The Income Statement (sometimes referred to as a P&L statement) is a statement showing the company's net profit or loss over a period of time (a month, a quarter, a year, etc.) The income statement would show expenses and amortization incurred during the period, so in year two of a 3-year RI, the amortization for the second year would show up as an expense against earnings in the period covered.

 

NPV or Net Present Value. An assessment used to calculate the long-term profitability of a project made by adding together all the revenue it can be expected to achieve over its whole life and deducting all the costs involved, discounting both future costs and revenue at an appropriate rate. In a cloud business case, the net present value of all the cash flows of a no-upfront RI might be compared to the current cash value of the all upfront RI for determining which is better for the business.

 

Depreciation means retiring the cost of an asset gradually overtime on a schedule which reflects the provision of benefits. Often this reflects the decrease in value of an asset over time due to wear and tear or usefulness because of continued use in out periods.

 

EBITDA. Earnings Before Interest, Taxes, Depreciation, and Amortization. An assessment of the earnings expected when subtracting only the cost of goods sold from the revenue achieved. Tracking the prepaid expenses of a 3-year all-upfront Reserved Instance as a cash outlay that can be amortized over three years would affect EBITDA differently than if the resources were purchased using cash at on-demand rates. 

 

Capitalization is the ability to treat an investment or outlay as a capital item which will be depreciated or amortized in future periods. Cost Allocation is in FinOps, the ability to identify and allocate costs to the appropriate cost categories in use. Ideally direct costs, amortized costs, and shared costs can be allocated to individual budgeting categories for a clear view of the entire cost of running my application or workload in the cloud.

 

Unit Economics is the ability to directly compare my overall cost to the overall business benefit l am creating on a per unit basis. For example, if I understand that the overall cost of running my website infrastructure is $5Mil per month and is able to support 10,000,000 paid hosted web pages, then I can track a Webpage/$ metric of "2" which indicates how efficiently I run my service. Any future modifications to my cloud infrastructure can then be expressed in terms of the Webpage/$ metric to determine if they are helping or hurting, and opportunities for cost savings can be expressed in terms of how they impact Webpages/$.

 

Fixed Cost. A cost which does not change with changes in business volume. The cost of a data center building mortgage is a fixed cost in that it does not vary regardless of whether there it is supporting 1 web server or 1,000,000 web servers driving the company's revenue.

 

Balance Sheet. A statement of financial position of the business on a specific date which indicates the value of all assets and liabilities as of that date, including the retained value of any undepreciated or unamortized capitalizable items. A company purchasing a 3-year RiI at the beginning of a year would show that RI with % of its original value on the Balance Sheet on the last day of that year.

 

Capex Capital Expenditure - the purchase of a capitalizable asset, such as a building or equipment meant to provide value over a long term and thus to be depreciated or amortized over that term. Purchasing a data center and using it over 30 years is considered a Capital Expenditure while paying to run a virtual server in the cloud for this month is not.

 

Congratulations! You passed a heavy theoretical part and learned about the most important terms and their meanings in the cloud and finance context!