I recently attended the 2017 P21 Worldwide User Group meeting in Orlando, and it was a wonderful event. I continue to be amazed by the P21 use community. They are truly a breed apart and love to help each other. This keeps me energized and engaged to continue staying involved. There was one session in particular that was very intriguing. The session was an open Q&A with Michael Morisoli and David Klee of Heraflux Technologies. These guys are titans in their fields and when they are answering your questions, you are getting some solid advice. One of the most interesting questions was centered around Prophet 21 cost. Specifically, the audience member how much should a server for Prophet 21 cost.
David gave a very good range on the server cost, but that wasn’t what struck me as interesting. The continued interaction on the topic made me realize that people are looking at these server prices and getting sticker shock. I started wondering if the people who need this gear are aware of how they can work a purchase like this through the financial statement of a company. Hence the blog post to help manage Prophet 21 cost.
How to Afford the Prophet 21 Cost…A Corporate Finance Crash Course
P21 servers can get expensive. I have recently purchased 2 hosts. One of them, the mainline P21 server has 2Tb of locally attached SSD hard drive storage, 2 E5-2667v4 processors and 256Gb RAM. I am running 180 active users on this box (5 RDP servers and the SQL server). I was all in for about $18,000 on that one host. That’s not cheap by any means, but just because something has a high price tag doesn’t mean you have to take a big hit all at once. The harsh reality is that a Server for Prophet 21 cost is higher than the general use server, you have to plan for it.
Servers are an asset. They are a resource that has a value. From a tax and finance standpoint that means they are treated with special care. It is not like buying a $400 phone. Small purchases like that are immediately expensed in the month that they are purchased or paid for. In other words, the full purchase value is deducted from the overall company profit immediately.
Assets are a different deal. They are big ticket items and they have a useful lifespan. Accounting rules allow you to spread the cost over the useful life of the equipment. This is called depreciation, kind of like your car depreciates (loses value) over time. Let’s take the $18,000 server as an example:
Server Depreciation Example
- Purchase Cost: $18,000
- Useful Life: 4 years
- Cost Per Year: $4,500 (18,000 / 4)
- Cost Per Month: $375 ($18,000 / 48)
When your company buys a server, they should be counting it as a fixed asset. When they do this, they will assign it a lifespan and then each month for the duration of the lifespan they will expense a part of the server. Yes, you have to shell out the $18,000, but it only hits profitability every month for $375. It’s kind of like financing it over a period of time. Depreciation is a tax deductible, non-cash expense. In other words, yes you shelled out $18,000 up front, but every year for the next 4 years, you get to write off some of that. On top of that, you get this write-off, but since you have already paid for it, you do not spend any more cash to keep getting the write-off.
Prophet 21 Cost: Lease vs Buy for the Server
There are many different ways to look at the lease versus buy decision on a server. Most of the time, the cheapest way to go is to buy the server and depreciate it over time. An outright purchase on the server will usually allow you to pay the least amount for the hardware over it’s lifespan. That said, there are times when leasing also makes sense. The difference is cash. If your company is focused on managing cash flow, that means they highly desire predictable income and expenses. This allows the company to maximize the value of cash on hand. This is very important for any company, but some companies make it a focal point for day to day operations.
In the case where “cash is king”, leasing might be a better option. The server can be leased for the duration of its lifespan and then swapped out at the end of the lease. Many of the lease programs have a buyout option at the end which allows you to keep the equipment, sometimes for as little as one dollar. The total of the lease payments is usually going to add up to more that the purchase price of the server, but let’s be honest, you are financing it, so yeah, you pay a little more. However, with a lease, there is no big cash outlay up front, and the lease is treated like an expense and gets written off for tax purposes.
Turn a No into a Yes
If you are an IT person, you may not have had much exposure to corporate finance. If that is the case, spend some time with your Controller or CFO. Ask questions. Get an understanding of what the touch points are. If you demonstrate a desire to learn and understand how to bring an asset into the organization, you are far more likely to get a yes. Don’t be the person who says “we need to spend $20,000 on a server for P21”. Do some research. Figure out the life cycle of the equipment. Make a proposal that gives your management team some options.
What a Good Proposal Sounds Like
“When we upgrade P21 next time, we expect that there will be a [X]% loss in system performance due to more overhead in the application. Our current server is [Y] years old. We can replace it for $20,000, and it will have a useful life of about 4 years, so it will cost us about $600 per month if we depreciate it. I have also received 3 lease proposals from acceptable vendors and they average $730 per month. If we buy it, the server is actually probably going to last 5 to 7 years, so my plan is that in years 5-7 we will demote the server and use it for non-critical applications, meaning that we basically get 3 free years of use from it at the end.”
If someone comes to me with a proposal like that, they are getting a yes unless I simply cannot afford it at all. I want to know that there was thought put into it. I want to know that there were options considered. Be prepared for questions. Good servers for Prophet 21 cost more than a general purpose server. The right processors, optimized for single thread, are expensive. SSD drives are more expensive. That said, the difference is night and day when you have the right gear. Go turn a no into a yes for your server purchase!
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