You are the IT department head in your company. There are multiple company objectives that you are required to meet, some initiatives of your own, contingencies that may come up. You have to make projections about how much you need for the coming year on heads like hardware, new software and upgrades, hiring, training etc. You know quite well that finance will not give you all you ask, so your best bet would be to make a projection such that most of what you asked will be approved!
Then there is also the matter of allocating finances once you know how much you will actually have. Again you have to make critical decisions, never been an easy task. Just take a look at how finance ministers of various countries struggle to manage priorities. Add to it falling revenues in times of recession (as true for 2008-2009), which means supplementary allocations in the middle of the year may be hard to come by. And finally, a lack of financial training among managers of technical departments can make the whole thing a terrible nightmare.
Our 2009 Budget Toolkit for IT Managers is an attempt to help you out. We have attempted to create templates for various budgetary components that you can use to derive accurate guesses for how much money and resource allocation is needed for every input and process.
When preparing a budget, some questions you need to answer are:-
1.What are the purchases I am making this year? How are the payments being rolled out (amortization)?
2.What is the return on the investments (ROI) I am making? Will I be able to earn back my spend?
3.What is the total cost of each application you choose to buy? Some components are directly estimable, while others add to the cost indirectly. E.g. your costs need to include performing backups, supporting IT servers, handling desktop costs, and allocating management overhead.
4. What IT resources are being allocated to each department in your organization?
5. What are you paying out in salaries?
Once your budget allocations are made, there is a lot of monitoring you have to do. Are your purchases and payments happening on schedule? How are each of your projects doing financially – i.e. are they running in deficit, break-even or surplus?
Each of these will be taken up in detail in the coming blogs.
Financial Nature: First you need to know whether your organization is capital intensive or expenses driven. A capital-intensive organization has to make large investments in equipment and supplies over the course of a year to run its business, e.g. A hospital. In such an organization, building up assets is looked upon favorably. An expenses-driven firm does not need such high recurring expenses, such as a bank. Their outlook therefore is to limit spending and avoid capital expenditures. An IT firm or department is often of the latter kind.
Cash flow: the net balance of incomes and expenses. This determines whether you may have enough money to finance a project, or require a loan.
Financial metrics: A number of monetary parameters used to determine the health of your organization. One is asset-turnover ration, an indicator of how your purchases of equipment (assets) are impacting the company’s revenues.
Opportunity cost: This is the trade-off between the cost of a new (or ongoing) project, and the potential pay-off of starting (or continuing) it. Almost all projects are a net cost to the organization initially, and they may take months, if not years to start showing profits.
We have put together a more detailed primer in our Budget Toolkit.
But that is not enough. Budgets in recessionary times are a different matter – the money available maybe even less. Secondly, if the IT department is not a core function of the organization, the finance department may be tempted to further cut allocations.
In these cases, a little more creativity can be used to draw up your budget. The Toolkit includes 10 tips on managing your budget for difficult times, of which we’ll leak out one.
Many organizations keep a budget for team meals and entertainment, which go a long way in keeping up employee morale and busting stress. While it is tempting to cut back on this, the savings might not be much, but the psychological cost might become high. So do find creative ways of managing this budget!
To help you start out, we have worked out a Budget Template in the Budget Toolkit that you can use, with the help of a fixed example. The first is to list out all your departmental expenses – salaries, utility bills, purchases, maintenance costs, travel, recruitment, training etc. You will also need to compare with departments with whom you may overlap, e.g. training may overlap with HR.
That done, you need to take into account rises in costs – increases in salaries due to promotions, recruitment or increments; increases in software and hardware prices or utility bills due to inflation etc.; cost of obtaining services (e.g. travel agent bills etc).
Once you have drawn up the overall budgets, get down to details. This post will discuss amortization, hardware capitalization and investment analysis.
Amortization: This template will help you plan out payments. Originally used in banking (for payment of loans), it helps you calculate EMIs where you have to account for principal and interest. You can use this template to calculate payments when you have purchased (or plan to purchase) something on an installment basis.
Hardware Capitalization: This template deals with hardware-related expenses. Once you have bought something tangible, its resale value keeps decreasing (depreciation). You have to figure that into the budget, as well the revenue you expect the asset to contribute to, and the maintenance cost associated with it. e.g. if you are a manufacturing company, the revenue generated by industrial equipment (say a lathe) may be easily calculated, whereas that for office equipment (say a laptop) may not. The template gives you a filled example of how you may go about calculating these expenses.
Investment Analysis: every expense you make, you will have to justify it on the basis of potential revenue. This is especially true for any new project you plan to undertake, given how conservative finance departments tend to be. One way of doing this is Net Present Value (NPV), which converts future expected revenues into current rates, accounting for inflation. Another is the Internal rate of Return (IRR), which determines at what rate of return every year you will recoup the investment. It must be above a minimum Hurdle Rate for the project to be considered viable.
We have prepared a template with examples on how you can prepare an investment analysis. Remember, a good budget is one which can convince skeptical decision makers that your venture is profitable in a given span of time.
Budgets and accounting can become a great headache if records are not kept properly. You may know by experience how painful closing accounts can be at the end of the year, as you have to rifle through files to trace every bill, every salary slip to make the debit balance credit. We hope that our templates devised under the Budget Toolkit will be of help in keeping these records.
Purchase Orders:- Everytime you sign a purchase order for some equipment, software, license or service, do remember to have a summary of it stored in a centralised place. Merely filing a hard copy away in a large box-file will not do. Our simple Purchase Order Template will help you track each purchase order by date, vendor, purchase type and cost. You can also arrange your orders by parameter, especially when you have to decide where your biggest costs are happening and how you can trim them.
Salaries:- In the course of the year you will hire folk, some will leave, and after an appraisal there will be raises and promotions. Besides, there may be advances on salary, taxes and other deductions you must keep track of. For each employee whose salary check you have to pay out, it helps to keep a record of how much you are paying out each month in a centralized place. This will come in handy as a major source of data when preparing your budget, so you make decisions accordingly. Our Salary Template will help you do this.
Total Cost of Ownership (TCO):- As mentioned in the introductory blogpost on Budgeting for IT, the overall cost of an asset you acquire isn’t just the money you paid out while acquiring it. TCO is similar to Hardware Capitalization (HC) when applied to tangible assets, but it is also applicable to software and other intangibles to which HC doesn’t apply. You have to factor in depreciation (if applicable), additional unavoidable costs (e.g. if you buy a laptop you may have to buy an antivirus and a net connection), the cost of people you may have to hire, server space (e.g. if you book a domain, the server space has to be also accounted) and so on. And then there will be maintenance and/or upgrade costs and so on.
We have created a TCO Template to help you deal with this. What it does is help you list out every possible cost associated with the basic cost, and take your calculations forward from there.
In the next blog, we will discuss resource allocation and project summary.
Time is money. This is not just a proverb, but a quantifiable measure. How much time is given to each function is not just a measure of how important it is, but also determines the total costs and economy of the function. Thus a budget manager must not just account for money allocated to each project, but also the time and personnel he is giving it.
A critical parameter is Full Time Equivalent (FTE). If you decide to make an employee work on a project for all his time, then you have allocated one FTE of your available resources to that project, and you can convert that into monetary terms.
The Resource Allocation Template can help you make a record of all your resources in terms of FTE. You can then use that to assign priorities to projects, as well as assign staff and budget to them.
The devil is in the details, it is said, but it is also necessary to focus on the bigger picture. One, because it will give you a long-term perspective on your department’s activities, and two, because your higher-ups may only want to see the big numbers and not look at the details. There are three sheets that count.
The first is the capital outlay – the expenses you want to incur in building assets. Then there are the recurring expenses – what you need to spend to keep the project going. And finally the benefits – how are each of your projects going to benefit the organization. These are the sort of sheets that will help you swing the big bosses to give you what allocation you want!
The Project Summary Template will help you prepare each of these sheets, with the help of a filled-in example.
