Financial knowledge is a must for all engineers, even those outside of management, as they supervise projects and provide strategic direction. For those in management, however, having an understanding of finance is crucial to a company’s future. To better understand the link between the two fields of study, here are three reasons why engineers should consider studying finance.
1. Knowing Whether to Engineer Low-Cost Parts
Engineers often face the question of whether to create a new part with Non-Recurring Engineering (NRE) investment. The goal of NRE is to save a certain amount of money per unit over a period of time. The decision on whether to engineer a part or not is, therefore, a financial decision, and financial savvy is needed to make it.
Engineers must first determine what the total savings will be during the part’s lifetime. They must also figure out whether these savings are worth the initial investment – that is whether they exceed it. When savings do not exceed the investment, the engineer decides against creating a new part. But when they do, an engineer must still calculate how long it will take to break even on the investment. To be able to do such calculations accurately, you might find it necessary to enroll in an online master of science in taxation from, say, Northeastern University.
2. Knowing Whether to Delay a Project
A project delay is one of the most expensive challenges an engineering company can face. But sometimes, a delay cannot be avoided. One such time is when a project is put on hold in order to add in a new feature. This feature is usually meant to increase the project’s overall profitability. Engineers must then determine how much the delay will cost.
As a rule of thumb, if you delay a project by one quarter, you lose all gross profit from mature sales for that quarter. To determine whether this loss is worth it, engineers first calculate the gross profit of the new feature over its entire lifetime. They then compare this profit to the losses incurred to during the delay. When the profit exceeds the losses, engineers go ahead with the delay. If the profits cannot cover for the losses, a delay is considered not to be worth it.
3. Knowing Whether to Cancel or Continue With a Project
What if mid-way into a new project, a rival introduces a product that you know will cut your project’s profitability by, say, half? As an engineer, what do you do? The key here is to ignore the money that you have already spent. Only the future matters. This is often true for projects nearing completion. Look at future returns and base your decision on that. But for projects in their infancy, use financial methods to determine whether a cancellation is necessary.
Although engineering is a technical field, engineers can profit greatly from the financial know-how that comes from an online MST degree. This new knowledge lets them better decide whether to engineer new parts, delay a project, or cancel it when its viability comes into question.