Cloud Financial Management: Why You Need It and How It Works

This is part of a series of articles about FinOps

What Is Cloud Financial Management? 

Cloud financial management is the practice of overseeing and optimizing cloud computing expenses within an organization. It aims to balance the cost and usage of cloud resources to ensure maximum return on investment (ROI). This involves an array of tasks including cost monitoring, budgeting, and resource allocation, all aimed at ensuring that you are using cloud resources in the most cost-effective manner.

To manage cloud expenses effectively, cloud financial management incorporates key principles from FinOps, which brings together professionals from technology, business, and finance to collaboratively manage cloud expenditures and ensure efficient use of cloud services.

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Benefits of Cloud Financial Management 

Increased Efficiency

Cloud financial management helps organizations to run their cloud operations more efficiently by monitoring and controlling usage, thereby reducing waste. By adopting FinOps principles, organizations can ensure that cloud resources are optimally allocated, and that every dollar spent on the cloud delivers value. The efficiency gains translate into direct cost savings and more effective resource utilization, allowing the organization to accomplish more with the same budget.

Improved Collaboration

Effective cloud financial management involves cross-functional teams from IT, operations, and finance. This collaborative approach ensures that all parties are aligned in terms of cloud strategy and spending. The result is better communication and collaboration, as everyone is aware of cost implications, operational requirements, and financial goals, making it easier to make well-informed decisions.

Enhanced Governance

With cloud financial management, organizations can implement robust governance models that control who can spend what and where within the cloud environment. This enables better tracking and accountability, ensuring that cloud costs are aligned with business objectives and compliance requirements. Enhanced governance also reduces risks related to overspending and ensures that cloud expenditure is consistent with organizational policies and objectives.

What Are Cloud Financial Management Tools and Platforms? 

Cloud financial management tools and platforms help businesses manage, plan, and optimize cloud costs. These tools provide a holistic view of your organization’s cloud spend, enabling you to predict costs, allocate resources efficiently, and drive cost savings. 

Cloud financial management tools integrate with multiple cloud providers, providing a unified view of multi-cloud expenditure. Furthermore, these tools offer advanced analytics capabilities that can provide deep insights into cloud usage patterns, helping you make data-driven decisions.

Key Components of Cloud Financial Management Tools 

Budgeting and Forecasting

The budgeting and forecasting component of cloud financial management provides businesses with the tools to predict future cloud costs accurately. It allows you to set budgets for different projects, departments, or cloud resources, ensuring that you don’t exceed your financial limits.

Forecasting tools use historical data to predict future cloud costs. They factor in business growth rates, seasonal variations, and other relevant data to provide accurate forecasts. This enables you to plan your cloud investments effectively and avoid unexpected costs.

Budgeting and forecasting tools also provide alerts when you’re nearing your budget limit or when your actual spend is significantly different from your forecast. This ensures that you’re always in control of your cloud finances.

Cost Allocation

Cost allocation involves assigning cloud costs to different departments, projects, or resources based on their usage. This provides a clear picture of who or what is driving your cloud costs.

Cost allocation tools can track cloud usage down to granular details. They can identify which instances, services, or users are consuming the most resources, enabling you to pinpoint areas of waste.

The data from cost allocation can also be used to create chargeback or showback reports. These reports provide detailed breakdowns of cloud costs, allowing teams to understand their cloud spend better.

Cost Optimization

Cost optimization is perhaps the most valuable component of cloud financial management tools. It analyzes cloud usage patterns and provides recommendations on how you can optimize your cloud spend. 

For example, cost optimization tools can identify idle or underutilized instances, suggest right-sizing opportunities, and recommend reserved or spot instances. They can also provide insights into wasteful practices such as unneeded data egress costs or inefficient storage usage.

By implementing the recommendations from cost optimization tools, businesses can significantly reduce their cloud costs without compromising on performance or availability. In some cases, cloud financial management solutions can even apply cost optimizations automatically without human intervention. 

Reporting and Analytics

Reporting and analytics features provide detailed insights into your cloud spend. Cloud financial management tools can generate comprehensive reports about cloud costs, usage, and performance. These reports can be customized to meet the specific needs of different stakeholders in your organization.

Analytics tools go a step further by uncovering trends, anomalies, or patterns in your cloud usage. This can help you identify potential issues before they become significant problems, ensuring that you get maximum value from your cloud investments.

Learn more in our detailed guide to FinOps tools 

4 Ways Cloud Financial Management Tools Reduce Cloud Costs 

Here are a few techniques commonly used by cloud financial management tools to cut cloud costs.

Right-Sizing Resources

Right-sizing involves adjusting cloud resources to match your actual usage. This can involve scaling down over-provisioned instances or switching to a different instance type that better suits your workload.

Right-sizing can lead to significant cost savings. However, it requires a deep understanding of your cloud usage patterns and the performance characteristics of different instance types. Cloud financial management tools provide the insights organizations need to right-size effectively.

Leveraging Reserved and Spot Instances

Reserved and spot instances are cost-saving options offered by many cloud providers. Reserved instances involve committing to a certain level of usage in exchange for discounted rates. Spot instances, on the other hand, allow you to bid on unused capacity at significantly reduced prices.

Both these options can lead to substantial cost savings. However, they require careful planning and management to avoid potential pitfalls. For instance, reserved instances require a long-term commitment, while spot instances come with the risk of being outbid.

Cloud financial management tools can provide the insights and automation capabilities you need to leverage reserved and spot instances effectively.

Monitoring and Alerts

Monitoring and alerts are essential for maintaining control over your cloud spend. By continuously monitoring your cloud usage and costs, you can identify any unexpected spikes or anomalies.

Cloud financial management tools can notify you when you’re nearing your budget limit, when your actual spend is significantly different from your forecast, or when there are significant changes in your cloud usage. This ensures that you’re always aware of your cloud finances and can take corrective action if needed.

Analyzing Cloud Bills and Generating Recommendations

Regularly reviewing your cloud bills is another effective strategy for managing your cloud finances. This can help you identify any unexpected charges or changes in your cloud costs.

Cloud bills can be complex and difficult to understand. However, cloud financial management tools can simplify this process by providing detailed breakdowns of your cloud costs. They can also provide insights into your cloud usage patterns, helping you identify areas of wastage or opportunities for cost savings.

Challenges in Cloud Financial Management 

While cloud financial management offers critical benefits for organizations that operate workloads in the cloud, it comes with a unique set of challenges.

Complex Pricing Models

One of the challenges in cloud financial management is dealing with complex pricing models. Cloud services often come with many different pricing options, and pricing may differ between cloud services and providers, making it difficult to determine the most cost-effective choice.

Cloud financial management tools can help, but to understand their recommendations and make the right choices, it’s crucial to understand the pricing models of different cloud providers, and also understand the business needs behind workloads running in the cloud.

Decentralized Cloud Spending

With cloud services, it’s easy for different departments within an organization to purchase their own cloud services. This can lead to uncontrolled spending, duplication of resources, and difficulty in tracking overall cloud costs.

Implementing a centralized cloud procurement strategy can help manage this challenge. It involves setting up a central procurement function that oversees and approves all cloud expenditures, ensuring that spending is controlled and aligned with the organization’s financial goals.

Unpredictable Workloads

Unlike traditional systems where capacities are fixed, cloud services can be scaled up or down based on demand. While this offers flexibility, it can also lead to unpredictable costs.

To manage this, it’s important to monitor and analyze your cloud usage regularly. This can help you identify trends and predict future usage, allowing you to plan and budget accordingly. While cloud financial management tools can help, they require a governance framework that ensures all parts of the organization operate cloud resources in line with organizational policies.

Learn more in our detailed guide to finops framework.

Cloud Financial Management with Spot by NetApp

To deliver continuous cloud and cost optimization, organizations need to operationalize their cloud financial management and follow the best practices outlined in this article. That means they need the right FinOps tools for reporting, alerts, and right-sizing and provisioning workloads.

Spot by NetApp enables you to reduce and govern your cloud spend without sacrificing flexibility, to achieve ongoing savings, optimize infrastructure, and make data-driven decisions around your cloud finances.

Learn more about Spot’s solutions for cloud financial management.