BUDGET | Budgeting Process

Understand the Operating Budget

Operating budgets are a concrete statement of plans relative to costs. As IT does not generally produce income or revenue, IT budgets forecast the purpose, amount and timing of projects, and operational spending. If you are new to the budgeting process, study the previous year's budget several months before your company's budgeting process begins. The single most important thing for you to do is to understand the details of your budget and know your costs. Each company has slightly different budget categories or line items.

In many organizations, personnel, payroll expenses, and benefits make up the major portion of IT costs. It is important to get the head count right. Include any open positions (and when you plan to fill them), promotions, and salary increases. In the budget, be sure to plan for a certain percent of employee turnover. Companies typically have a benefit percent (i.e., 30 percent) used as a standard. Performance bonuses, hiring bonuses, and overtime expenses can be significant. Be sure to plan for recruiting expenses for new hires or replacement employees, particularly if there will be an additional hiring bonus, which means that expenses may increase up to 30 percent. Pay attention to contract employee expenses and outside services as those costs mount quickly.
Annual hardware and software maintenance is usually predictable. Hardware maintenance is typically 15 to 20 percent whereas software maintenance ranges from 15 to 25 percent. Pay attention to fee increases, and review contract terms for planned increases. Meet with key vendors on a regular basis so that you know their plans and they know your plans. Telecommunications costs are variable and are important to manage. Make sure you understand the business plans and needs for connectivity.
Calculate training costs with an average cost per employee. In addition, budget for large, planned training expenses or specific employee development plans. For example, you could use an average of five development days per year per person at $500 per day. Estimate travel with an average cost per trip times the number of planned trips per month. If you have multiple facilities to support, travel is significant. Review historical travel for comparison, but also consider new efforts or projects that may increase travel. Consider travel costs for consultants or contractors, which typically run about $25 to $35 per hour. To contain costs, think about leasing an apartment for traveling consultants who are contracted over a few months. Alternatively, consider a relocation package if the traveling consultant is engaged for a longer period of time since the $5,000-$10,000 outlay is significantly lower than the weekly travel and lodging expenses. When calculating costs for meetings, consider team-building activities, which could be $500 per person. Companies typically allocate facility costs by a set percentage based on the number of employees.
Compare the new plan to previous years as well as future business plans to validate the new budget. Do not forget to account for new projects that move from development to support and maintenance and have associated operational costs. Consider the company's growth or decline as well as the continued need for faster network lines, more disk space, and more server or desktop processing power. Also, consider that as technology matures, costs typically decline, but you also need to plan for upgrades, obsolescence, or sunsetting technology.
Make sure the budget is aggressive, yet realistic. Although it may be challenging to justify at the time of budgeting, it is far worse to take criticism throughout the year as you try to explain why costs are continually higher than budget. A conservative budget depends on the flexibility of the organization, especially an organization with clear-cut business changes as opposed to a business with budget oversights.