Finance for Software Product Managers

I find that most product managers do not spend any time at all in analysing the financial aspects of the product. However, the truth is, the financial aspect of the product should be the most import criteria to be considered, from which all other goals are derived.

The existence or non-existence of a product should be based on the net profits that the product can generate, as that will directly be responsible for increasing the shareholder equity for the company.

Most product management theories talk about how the product manager should focus on the value proposition and value derived by the customer. What is this value?

The value is the capitalized value of the benefit derived by the customer. The capitalized value is the present value of the future net income derived from the product by the customer over a period of time. And the net income is revenue generated + operating cost saved – the cost incurred by adopting the product.

If the product is able to capture this value for the customer, then, at steady state, we can assume that the revenues generated from the product will also be equal to the capitalized value derived by the customer * the number of customers that can be gained.

And, so, the profitability of a product will basically depend on whether the net income derived for this product divided by the apportioned capital employed can beat the WACC or weighted average cost of capital.

With this premise, the product manager should perform various if-then scenario analysis for acquisition cost and operation costs to determine the feasibility and optimal path forward. Specifically, the operating leverage, that is the relation between the variable and fixed costs should be planned carefully.

Another important aspect of business finance that the product manager should pay attention to is the cash cycle, especially the order to cash cycle, which is also measures by the accounts receivable turnover ratio and DSO (days sales outstanding). In many target markets, such as government markets, this can be very high and can produce undue financial strain. The product manager should ensure that the defensive interval ratio (DIR = quick assets/projected expenditure attributed to the product) is healthy and sustainable.