A basic understanding of business finance will ensure that the security manager appreciates the value that the security program brings to an organization, as well as the cost of the program on the business bottom line.
Generic business management skills, such as understanding cost are important in security management. You cannot continually make the case for security on fear, uncertainty and doubt (FUD). In the long run this will lead to security downsizing. There has to be a financial case based on loss projections.
It is easy for a security manager to present a threat scenario based on FUD and then argue that the business cannot afford to be without security. The reality is that many businesses especially small and medium enterprises cannot afford to buy security. What may be perceived as a healthy turnover for a SME might be illusive if the business is financed by loans and related competing demands. It is not a wonder then that in such a case an organization may prioritize more immediate needs and select insurance as a less costly risk management alternative.
One of the most frequent false assumptions of security managers is to regard physical security as a must have and the security budget as being too valuable to be interfered with. This should not be the case. Organizations are continually cutting costs to remain competitive, and the security budget is an obvious target. Often when spending cuts are necessary the security manager that hasn’t based his or her case for security on a sound financial foundation will be less able than his cross- business peers to present a cogent argument to defend his or her budget. Therefore an understanding of basic arithmetic is important.
In every organization there are three basic kinds of cost:-
1. Variable costs – These vary according to output. For instance in a manufacturing business, the amount of raw material required will vary in direct proportion to the number of manufactured merchandise produced. This is why businesses constantly try to negotiate best deals for raw materials through a variety of means.
2. Semi-variable costs – These are costs which to some extent vary according to production or operations, but which always have a baseline cost, irrespective of the level of output. Energy in terms of power and fuel is the most obvious example. The higher the level of production or operations the more the power or fuel is required. There is little businesses can do to reduce the cost of energy, so they look for efficient and innovative ways of energy use, supply and recycling.
3. Fixed costs – Of all the cost groups, it is fixed costs often referred as overheads that can cripple a business into becoming non – competitive. Unlike variable costs and to an extent semi-variable costs, fixed costs remain constant irrespective of the level of output, income or profit. Fixed costs can include rent, administrative staff and most importantly the security budget. It is therefore not surprising that when businesses need to cut costs this is where the first bite occurs.
Security expenditure
For any security expenditure there are likely two kinds of costs. Outlay costs usually called capital expenditure (Capex), and recurring costs usually called operating expenditure (Opex). These are typically expressed over a period of a year. Security equipment has a high capex and usually a low recurring opex. Security manpower has a high opex and a low capex. In some circumstances security elements have both a high capex and a high opex and sometimes equipment is procured without a full appreciation of the associated opex costs.