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IT Budgeting operational and capital budgeting made easy

“helping IT managers of the world achieve more™ success”

Mike Sisco’s Practical IT Manager GOLD Series

Copyright © MDE Enterprises, Inc. www.itmanagerinstitute.com

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Practical IT Manager GOLD Series

IT Budgeting operational and capital budgeting made easy

2nd edition


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Mike Sisco, ITBMC

Introduction Hello and welcome to the Practical IT Manager GOLD Series. I'm Mike Sisco, President of MDE Enterprises, Inc. and a career IT manager and CIO of more than 20 years. Since 2000, I have devoted my life to, "helping IT managers of the world achieve more success". My practical processes and tools are used by thousands of IT managers in every part of the world. The challenge of managing technology resources has never been more demanding than it is now. Change occurs more rapidly and technology resources are in more demand than ever before.

People and companies respond to strong leadership. Effective leadership skills give a technology manager an edge in creating and maintaining a stable business environment. This leads to more success and an IT organization that's valued and appreciated by the business managers of your company. The material contained in the entire Practical IT Manager GOLD Series of books has been developed from my experience in managing technical organizations of all sizes for more than 20 years. The examples are ‘real life’ experiences of things I know to work, or hard lessons learned from things that did not work. I developed every process and tool you will learn about to help me manage IT organizations during my career. They worked for me and will for you as well. Two tools I use to enhance the material or to clarify a point are: Sidebar: a comment or clarification to help make a point Personal Note: a personal experience or “war story” to reinforce a point. You will find a bit of humor to make the reading more enjoyable and to emphasize certain points. Because of my very “dry sense of humor”, you may have to look for the humor, , , sorry about that. I also hope you like the images I pop in at times to make the reading more interesting.


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The Practical IT Manager GOLD Series includes the following titles: IT Management-101: fundamentals to achieve more™ IT Assessment: the key to IT success

IT Strategy: align your IT vision for business value IT Organization: right-size your organization for success

IT Project Management: a practical approach IT Staff Motivation and Development: build a world class team IT Asset Management: tracking technology assets

IT Budgeting: operational and capital budgeting made easy IT Due Diligence: merger & acquisition discovery process IT Assimilation: consolidating redundant technologies What to Look For in a CIO: get more value from your IT investment , , , plus more titles to come

To view the Table of Contents for each publication or to discover other IT manager products and services we offer , go to www.itmanagerinstitute.com for more information. Interested in our IT Manager Institute and IT Business Manager Certification (ITBMC) program? It is one of the most successful IT manager training programs in the industry and available in both classroom and self study formats. Go to www.itmanagerinstitute.com for details. Managing IT organizations at a high level is serious business, but having fun along the way is also important. I hope you find the material helpful in your quest and welcome your feedback. You may contact me at [email protected] . Best regards and success,

Mike Sisco, ITBMC MDE Enterprises, Inc. www.itmanagerinstitute.com Additional resources from Mike Sisco ITLever Blog www.itlever.com Free tips and tools, , , updated frequently IT Manager Institute www.itmanagerinstitute.com Both classroom and self study versions are available 20 Minute IT Manager www.20minuteitmanager.com Complete library of over 160 e-Learning sessions


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IT Budgeting Table of Contents

Introduction …………………………………………………………………… 4 I. Why Do We Need a Business Plan? ……………………………………. 7 II. Key Elements of an IT Business Plan ………………………………….. 14 III. The IT Operating Budget ……………………………………………. 18 A. Staffing …………………………………………………………… 29

B. Benefits Factor & Staff Related Costs ……………………………. 37 1. Standard benefit costs ……………………………………… 37 2. Bonuses and Other Compensation ……………………… 38 3. Recruiting …………………………………………………… 39 4. Relocation …………………………………………………… 40 5. Temporary Labor …………………………………………… 40 6. Training and Education …………………………………… 41

7. Travel and Entertainment ………………………………… 43 C. IT Related Costs in the Company ………………………………… 45

1. Telecommunications - Data ………………………………. 45 2. Telephone - Voice and Fax ……………………………….. 49

3. Maintenance ………………………………………………… 51 4. Software Licenses …………………………………… 55 5. Consulting …………………………………………… 60 6. Office Supplies ……………………………………………… 60 7. Miscellaneous ……………………………………………….. 61

D. Review Your Operating Budget Draft …………………………… 62 IV. IT Capital Budget …………………………………………………… 67 A. IT Capital Plans …………………………………………………… 70 B. Non-IT Department Plans ………………………………………… 72

C. Capital Request and Approval Process ………………………… 73 V. Presenting Your Plan …………………………………………………… 75 VI. Monitoring the Plan ……………………………………………………… 76 Summary ………………………………………………………………………. 78 APPENDIX: A. Budget Worksheet ………………………………………………………… 79 B. Sample Staffing Plan Worksheet ………………………………………… 80 C. Department Budget Template …………………………………………… 81 C. Budget Notes List ………………………………………………………… 82 D. Data Telecommunications Circuit Inventory …………………………… 83 E. Software License Template ……………………………………………… 84 F. Capital Budget Template ………………………………………………… 85 G. IT Major Projects List ………………………………………………………. 86


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I. Why Do We Need a Business Plan? Financial performance is critical for most companies. Manage your finances and your company can do very well, , , mismanage the financials and your company ultimately goes out of business. Every successful company operates from a business plan. Your budget is the “stake in the ground” that states the company’s expectations relative to financial performance for the coming year. Your company will not achieve much if you do not set and achieve financial goals for your company. The company’s business plan starts at the very top of the management chain in a company. The CEO is responsible to the Board of Directors, company owners (normally stockholders), and employees for setting the direction and achieving the goals that are established for the company. Obviously, all of this doesn’t happen by itself. When viewing a company’s financial situation there are many factors a CEO must consider such as:

- Market share - Revenue - Profit - Earnings per share - Competition - Company differentiation - Growth - New markets - Stock value - Capital funding for growth - Cash flow - Balance sheet

The CEO and CFO define the company’s goals for each year. Much of the yardstick to measure success will be the financial performance of the company. If you get to know many CEOs and CFOs, you will find they spend most of their time on activities that have something to do with financial performance. The financial performance of your company is what makes these executives “tick”.


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The financial numbers of a company are typically the best and easiest means for the management team or Board of Directors to measure company success and progress. If the company is a public company and its stock is sold over one of the public stock exchanges, the financial numbers play a key role for major investor decisions and purchases of your company’s stock. Let’s say it loud and clear, , ,

If you don’t believe it, wander up to Executive Row in your company where the CEO and CFO offices are when the monthly financial reports are produced. You will find them “hunkered down” , , , literally buried in the numbers. They want to know how the company is performing and the financial reports tell them.

Even if you are a “not for profit” company, financial performance is still critical. The better you perform financially, the more you are able to do for your charity or non-profit organization. You still have salaries and expenses to pay so the better you manage them the more successful you will be.


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Public companies are keenly interested in several financial factors. At the end of each quarter, the company will hold a major investor conference call to discuss the company’s recent financial performance. Investors make notes and look for indicators to determine if they want to buy, sell, or hold the company’s stock. In every call I’ve sat in on there were several focuses to the questions investors asked.

1. Revenue A. Comparison to quarterly and YTD budget forecast B. Current quarter C. Comparison to last quarter D. Comparison to last year at this time E. Year to date (YTD) F. Year to date this year compared to year to date last year

2. Earnings A. Comparison to quarterly and YTD budgeted forecast B. Current quarter C. Comparison to last quarter D. Comparison to last year at this time E. Year to date (YTD) F. Year to date this year compared to year to date last year

3. Earnings per share A. Comparison to quarterly and YTD budgeted forecast B. Current quarter C. Comparison to last quarter D. Comparison to last year at this time E. Year to date F. Year to date this year compared to year to date last year

4. Internal growth versus acquisition growth 5. Significant events that affected financial performance (good or bad) 6. Key issues that are likely to affect future financial performance

Three key measurements are highlighted above, , , “Comparison to quarterly and YTD budgeted forecast”. Each of these questions tie to the company’s budget and how successful the senior management team forecasts financial performance and is able to deliver. This means you not only need to do a good job in budgeting financial performance, , , you must deliver the goods by managing revenue and expense.


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Investors look for indications that suggest future revenues and/or earnings are going to meet expectations. They need justification to purchase your company stock. If they think your company will perform well or above budgeted expectations, they might buy considerable amount of company stock. Stock investors have one rule, , , make money. It’s really the only reason they buy your stock. Stock investors also know there is a simple guideline that governs the value of a company stock. Bad news will cause the stock price of any company to fall, and when bad news comes, , , the price falls quickly. So, investors have a simple guide to minimize risk of losing money in their investment in your company. When investors hear anything that suggests “bad news” , they always, , ,

For example, stock investors know that if you announce you missed your quarterly profit forecast of 20 cents per share by one or two cents per share, , , the stock price will immediately plummet from $60.00 per share to $12.00 to $15.00 per share over night. As soon as they hear bad news, , , investors immediately sell. What’s the point? The point is, , , senior management is focused on financial performance. It is the report card that tells the world how the company is doing. Defining the new year business plan numbers must take a lot into consideration. A CEO and CFO’s job is literally at risk if they cannot budget realistic financial performance and deliver upon the expectations they set.


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The IT organization is a key component of the mix. The CEO needs a CIO who understands the importance of achieving the numbers every year. He also wants a CIO who can identify leverage points that will help the company become more profitable. It is no longer good enough to deliver great technical services. The IT organization must be keenly aware of providing technology services that deliver business value. I define “business value” as:

• Increase revenue • Decrease cost • Improve productivity • Differentiate the company • Improve client satisfaction

When you analyze these items you quickly find that each has something to do with financial performance. Business value is what the CEO needs from IT, , , not technology. “Wait just a minute!”, you might say, , , “Mike is going off the deep end.” Not exactly. The company certainly needs technology to perform well. But the thing we all need to be aware of is that your company only needs technology if it provides business value in some way. Take a good look at the five elements of business value listed above. Every project you recommend and every dollar you spend in the IT organization should do something to provide business value. If not, you are wasting time and money. Your job as an IT manager or CIO is to help the company perform and be successful. This means two things:

1. A CIO must develop an aggressive but achievable annual business plan. 2. An IT business plan needs to leverage productivity and improve earnings of

the company.

If you thought becoming an IT manager meant getting the opportunity to play with all the neatest new technology, you’re way off course.


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A CIO is the facilitator of all the technology projects and initiatives. He or she is also the internal sales person to gain commitment and support for IT projects. The higher up the ladder you go, the less technical you tend to become, especially in a larger company. You may not realize it but the IT organization offers your company real leverage. IT is the only organization in a company that can positively impact every organization in the company, , , by helping other organizations reduce expense or improve productivity. A CIO must have a solid financial understanding of the IT organization and the individual initiatives or projects he is supporting. Financial insight of the impact projects have on the company are critical. The CIO needs to understand it all and be able to discuss projects in financial terms. We see more CIO involvement in Board of Director and senior manager meetings because of the financial impact IT projects have. Strong business management and presentation skills are becoming more important all the time. If your career goal is to become a CIO one day, work to enhance the following skills:

- Presentation skills - Strategic planning - Financial planning - Leadership skills - Communication skills

If your goal is to stay on the cutting edge of technology capability, you should seek a career path that remains more technical in nature, not business management. Regardless of your management position, you need to learn how to budget for your business. Budgeting is not a requirement for many IT managers because the CIO of a small company often develops the budget himself. At some point, you need to know how to budget, , , at a CIO level budgeting must be a core competency so you need to develop budgeting skills before you get there.

Even if your CIO does the entire budget for the IT organization himself, get involved in the thought process and learn how the numbers are put together. This book will give you a step by step approach to budget an IT organization. Sidebar: Let’s say for example you manage a Help Desk of eight people. You can take a shot at putting the budget numbers together for all the expenses your department is expected to have for the next year using the material in this publication. Working with your CIO to see how he budgets for the Help Desk will provide insight and help develop your budgeting skills. Ask to be involved and he will probably include you.


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The essence of why we develop a business plan or budget every year is to target where we will be in order to create predictability in the value of our company. The IT department is a small part of the total plan but a very important part nonetheless. Your ability to develop a business plan that supports the company’s annual objectives and to meet or exceed that plan will create huge support from the CFO and CEO. The CEO and CFO tend to look at the business in more of a macro, or global financial level of the company as custodians of overall financial performance.

An example of this is that the CEO and CFO will usually monitor each department of the company as a percentage of revenue, , , a macro view. When they see this percentage start to shift they will initiate discussions to understand why the trend is occurring if not already understood, , , especially if it is a negative trend. When the numbers are tracking well, everyone is happy. A good CEO and CFO will analyze the numbers every month to look for indications of change that are either positive or negative.

You should monitor your IT financial numbers every month as well. We will discuss more about this later. Okay, by now you get the picture. Company executives are concerned with financial performance more than anything. The more you work with your CFO or CEO, the more you will appreciate how true this is. Be prepared for their questions by knowing your financial numbers and taking the steps to build business plans that are achievable. In the pages that follow you will learn how to budget in a way to insure success. Your CEO needs and expects the IT organization to achieve its budget, , ,just like he does with every organization in the company. The main reason you achieve a business plan is by understanding it and knowing where the key pressure points are that help you achieve success. Managers who fail to achieve their plan are the managers who don’t take the steps necessary to fully understand and own their plan.


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II. Key Elements of an IT Business Plan There are two primary budget parts in an IT business plan. Each has several parts that describe when and where you plan to spend money for technology resources. The two main parts are:

- IT Operating Budget - IT Capital Budget

Let’s discuss each a bit so you have a general idea before we jump into the detail. An IT Operating Budget details the spending planned for IT services for the next fiscal year, usually a calendar year. In our examples throughout, we will assume calendar year plans (January through December). The spending we are talking about in an operating budget includes things like salary, computer maintenance, supplies, travel, etc. In other words, it includes the normal expenses of operating the IT department. The IT Capital Budget includes the costs of large purchases for software, equipment, R&D, and other items that can be depreciated on the company’s Profit and Loss Report (P&L) over time, usually three to five years. Costs associated with large projects are also investments to make improvements in the company and can be depreciated such as consulting, travel, etc. Your CFO and CEO will make the decision to capitalize or not capitalize these investments. The key difference between an operating budget and a capital budget is that an operating budget is tied to normal operation while a capital budget is usually part of a major project initiative and includes one-time costs.


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In the chapters that follow, we will discuss the dynamics of an operations budget and capital budget. We will also create a sample budget using a few tools that will help you develop your own budget in the future. There are two other plans you will need to develop that contribute to your budget:

• IT strategy • Staffing plan

You need these two plans available when you begin developing an IT budget. A major reason IT managers miss their plan (i.e., spend more than they budget for) is because they haven’t developed an IT strategy. If you have not created a strategic IT plan, learn how in the publication titled, IT Strategy: align your IT vision for business value. An IT strategy is also important to develop a solid staffing plan. We will develop a staffing plan later in this book. When you start working on your budget, you will find that having a list of major projects you plan to work on in the coming year will help you account for all the expenses associated with them. If you do not know what you will be working on in the budget year, odds are very high you will miss your budget. Spend time to plan your business objectives and to understand the full cost to make it happen. It will save you embarrassment later on. A simple tool can help you identify major projects if you do not have an IT strategy.

IT Major Projects List

Project/Initiative

Timeframe Length of Time

IT Resource Needs

Other Cost

1 2 3 4 5

Data fields:

Project/Initiative Project name or description Timeframe Expected timeframe Length of Time Number of weeks or months to complete IT Resource Needs IT resources needed Other Cost List any costs associated with the project


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Making a list of major projects you plan to deliver next year in an IT Major Projects List will help you think about the expenses you will incur over and above day to day support. One of the things you can do with a major projects list is to layer a project’s expenses on top of your day to day support budgeted expenses. One of the reasons you might want to do this is because it makes it easier to know what expenses to pull out if a project is cancelled. Start by budgeting your normal operational expenses and create a base operating budget. When you complete your base plan, budget each major initiative separately and list the expenses that are over and above the normal support expenses already included in your operational budget. When completed with budgeting an initiative, “layer” each month’s extra project expenses on top of your base budget expenses. An example is shown below.

The purpose for developing your plans in this manner is that it makes it simpler to do as well as: Several benefits in doing this:

1. It forces you to look at each project initiative independently. 2. You may already have the project budgeted in normal support. 3. It helps to see the projects in case you need to adjust your plan. 4. It is easier to determine the financial impact of starting a project later.


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Remember me saying, “Many projects can be capitalized.”? This means the costs can be spread over several months or years as opposed to having the entire expense hit the Profit & Loss Report as soon as it is incurred. If a project is capitalized, you don’t budget for it in your operating budget. All the work to report the expenses of this nature will be taken care of by the accounting department. The only thing you will need to do is to define the expense budget for the project and provide actual expenses to the Accounting Department. On the other hand if your IT organization has an R&D Department, the CEO and CFO may capitalize all expenses associated with the department. In this case you would develop a budget for the R&D Department. The company still has the cash flow impact of capitalized projects even though the expenses can be reported over several months or years. Outside vendor costs, salaries, travel and other “operating” expenses usually have to be paid soon after the expense is incurred. Companies are given certain discretion as to what they capitalize or don’t. If they decide to capitalize a project, there are specific accounting guidelines the CFO must follow. He and the CEO will determine what will be capitalized and depreciated over time and what won’t.


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III. The IT Operating Budget An IT organization’s operating budget contains revenue and expenses you forecast to occur in the coming budget year. We will say it is for the “next calendar year”. There are two major groups to budget in an operations budget:

1. Revenue 2. Expense

Your IT operation may have responsibility for revenue. Many technology organizations sell professional services such as consulting, contract programming, etc. Others sell products such as software licenses and equipment. Over 90% of all IT organizations do not have revenue responsibility, but you might be in a company where you do. If so, you must forecast next year’s sales and include in your operations budget. Personal Note: I have been with two companies where my IT organization had revenue responsibility. Budgeting for revenue is the same process as budgeting for travel or salary expense. The same guidelines and cautions exist that we will discuss. The vast majority of IT organizations have only expenses to budget. Typically, the following expense categories are included in an IT organization’s operations budget and reported on the company’s Profit & Loss Statement:

- Payroll, benefits and other compensation - Training and education - Travel and entertainment - Rent - Equipment leases - Software licenses - Maintenance - Telecom (data and voice) - Consulting - Supplies

There will probably be other expense categories your company tracks. Be sure to include them in your thought process as we discuss budgeting for an IT organization. Before we get into actually developing a budget, let’s talk about a few things that will help you as you work on a budget.


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First, a few basics about budgeting Before we look at the expenses, let’s review a few basics about budgeting.

- Unforeseen events happen and the impact to an operating budget is almost always negative. You need to build in buffer to cover unexpected surprises.

- Only a novice builds a budget that has to work perfectly to achieve success. Perfect worlds do not exist in IT.

- Develop an IT strategy and spend time to quantify your needs. The better you know your business the more likely you will spend within your budget.

- Think about any activity which has tangible cost implications.

- Spend time on staffing and other large expense categories. There are usually six to eight large expense categories that will “make or break” your plan.

- Spending hours on low expense categories that make up less than 10% of your total budget has minimal value.

- Anticipate projects costing more and taking longer than people tell you.

- Make it your business to learn about company plans. Many require IT support like relocating an office or supporting a company acquisition.

- Anticipate vendor cost increases, salary increases, etc. and budget for them.

- Anticipate seasonal impacts. For example, professional services revenues may decline during the holidays when employees take vacation.

- Document your assumptions. They come in handy for future reference and in explaining or justifying the numbers.

- Review past year’s actual trend for each expense or revenue category. This will help you validate your assumptions and will be something the CFO will want to understand if your budget indicates a change from recent trends.

- Look for expense spikes in last year’s expenditures. A spike usually means an annual or semi-annual payment.

- Date and timestamp your worksheets so you always work with the latest draft.

- IT expense is a major cost to the company. An IT organization can be viewed as a drain on company profitability when it produces no revenue. Budget as if your clients are actually paying for your IT support services, , , they do.


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In general, senior management doesn’t care how you achieve your plan. They want to see an IT budget that is appropriate to support the business and one you can achieve. A budget is a forecast much like predicting the weather. Events change over the course of a year and they have direct impact on the IT department’s spending. I have developed hundreds of budgets. I have never developed a budget where we spent exactly what we thought we would spend when we put the budget together. The point is that you need to be in the “ballpark”, but reasonably conservative with enough buffer to weather the surprises. Here are three questions for you to ponder:

1. How much should IT spend and therefore budget for?

2. If your industry average for IT expense as a percent of revenue is 3%, should your IT organization spend 3% of your company’s revenue?

3. How much does the CEO and CFO want the IT organization to spend?

The answer to the first two questions is the same, , ,

That’s right, until you conduct an IT assessment to determine the needs and issues of your client and learn what your IT organization is capable of, , , it’s hard to know how much you should spend. Let me repeat, , , if you don’t know what you need to work on and you don’t have a grasp of what your organization can do, , , it is impossible to budget effectively. It is the same thing with the IT expense as a percent of revenue question. The industry average may be 3% of revenue, but your IT organization may need to spend 5%, 6%, even 8% of revenue due to your company situation, stability of your technology, and what your company wants to achieve. Be careful with industry averages. Every situation is different. Until you know the issues and what you need to accomplish, going with an industry average can be a big mistake.


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OK, what about the last question, “How much do the execs want to spend?” The answer is simple , , , they want to spend $0, ,, nothing, , , nadda, , , zilch. Don’t get too excited yet. If you were CEO, you would want to spend zero as well. Many CEO’s view IT spending as, , ,

“Every IT dollar is potentially a dollar pulled from profit.” I’ve already explained how important the financials are for a CEO, , , it’s real. However, and this is a BIG HOWEVER, , , an astute CEO understands the leverage technology offers the company by improving productivity, eliminating other costs, etc. A good CEO wants to spend money in IT when he understands the business value derived from it. Astute CEO’s view IT spending as, , ,

““EEvveerryy IITT ddoollllaarr iiss aa ppootteennttiiaall ooppppoorrttuunniittyy..”” You may have to teach your CEO about the leverage possibilities your IT organization offers the company, , , he may not realize it. Very common. When your IT organization consistently recommends cost justified projects that help your company by delivering quantifiable and tangible business value, you start earning partnership status and viewed as a business manager. Deliver technology and they will see you as a technology manager, not someone who offers the company real leverage. Your operating budget speaks volumes about how you manage the IT support business. It will spell out if you manage like a business person or like a technical person. I can assure you, , , you need to budget like a business person who owns this company. For every dollar you budget, you should ask yourself this question, , ,


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Document your assumptions One of the things you will want to do is document your assumptions as you go about determining how much to budget for each budget account. You need to be able to remember how you arrived at the numbers and unless you have a photographic memory, you need to put your assumptions down on paper. When you present your plan, senior management may want to know your rationale for budgeting what you did. They especially want to know the logic behind a forecasted trend of significant revenue or expense increase or decrease. Not only will it help you if you have to present your budget to the CFO, it will also help you later. It seems questions always come up and having a good memory just doesn’t work all that well at times. Document your assumptions and you can always go back to them for reference. It always helped me to include a Budget Assumptions page in my budget file that explains how I arrived at the numbers for major expense accounts and any revenue accounts if you have them.

Keep your assumptions simple and brief, , , no need for long paragraphs. All you need are a few bullet points that document the assumptions you used to get to your number. What is great about doing this is that when you start your budget work for the next year, pull out this year’s Budget Assumptions List and review it. The information will help you get started quickly and save you some time. You will learn the logic I use when budgeting each account in the pages that follow. It will give you plenty of insight to document your own budget assumptions.


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Buffer Let’s talk about budget buffer. You need to budget conservatively to assure you can make your plan (spend within what you have budgeted). To budget conservatively, you need “buffer” in the plan. There are several places you can build buffer into your budget. When you do, be realistic and don’t add too much buffer to the plan. Budgeting too much and underspending by considerable amounts is just as bad as budgeting too little and over spending. Both demonstrate poor budgeting skills and set false expectations. Here is a list of potential budget buffer opportunities:

1. New Staff – Several opportunities exist here. A. Start time - Most new employees do not actually start as soon as you

plan. In some cases you can delay or avoid hiring a new position. B. Staff turnover – If an employee leaves, there is normally a gap of time

before a replacement starts work. If you need to, you can delay or avoid the rehire.

C. Recruiting fee – Budget for an outside fee for every new hire but try to hire using internal employee referrals, not recruiters. Fifteen to twenty percent of annual salary is a typical recruiting fee to plan for.

D. Salary increases – Budget all employees for a normal increase but you will have a few who need improvement which means you will increase their pay later, less than normal, or not at all. This creates buffer.

2. Maintenance and License Fees – Anticipate a reasonable increase on the anniversary of the contract. If there is no increase, you have built in buffer.

3. Rent – Anticipate a rate increase on the anniversary of your lease(s). If you relocate offices, you might reduce the rent or you might renegotiate a longer lease for less monthly cost.

4. Training & Education – I like to plan an annual dollar amount per employee. You have buffer if you don’t spend it. Be careful with this one, , , training is a major motivator for IT employees. It is like cutting into muscle instead of fat.

5. Travel and Entertainment – Plan for projects to take 10-20% longer than what you think they will and budget travel as such. Completing projects on target now gives you upside and incentive.

6. Telecommunications – You may have opportunities to reduce your telecom expenses (voice, data, or both). If so, plan the reductions three full months later than you think to give yourself room and upside.


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Reporting A typical IT budget has many expense categories and maybe a few revenue categories. Each category is called an “account” such as Rent, Salary, etc. The entire list of categories is called the accounting “chart of accounts”. The chart of accounts includes all the categories (or accounts) your company chooses to track as it reports profit and loss in the Profit and Loss Statement (P&L Report) and the assets, liabilities, and equity of the company in the Balance Sheet Report. A chart of accounts varies from company to company so don’t get excited if you see an account in our examples that you don’t track or if we are missing one you do. You will typically find the following budget accounts in an IT organization except you may not have revenue responsibility. REVENUE Product Sales Licenses Maintenance Professional Services EXPENSES Staff Expenses

Salary Benefits Other Compensation Recruiting Relocation Contracted Labor Consulting Travel and Entertainment Phone Education and Training Rent Telecommunications Data Voice Hardware Maintenance Software Licenses Supplies

Miscellaneous


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Developing a budget is simpler than most make it out to be. One of the reasons IT managers procrastinate in working on their budget is because they don’t really know how to go about it. In addition, they spend too much time on the non-essential accounts so it takes an inordinate amount of time. High detail people like 90% of us in IT are can be perfectionists. We tend to want to be exact and accurate when we budget or do anything for that matter. The problem with this when budgeting is that this is not an exact science, , , it is a forecast estimate. When you try to be accurate, you will spend far too much time in developing a budget than what you should and, , ,

,, ,, ,, bbuuddggeettiinngg bbeeccoommeess aa ppaaiinn ttoo ddoo!! If something is painful, most of us tend to avoid it, , , so, many managers put off working on their budget until the very last minute. Sidebar: If the CFO sends out the budget templates to all department managers and asks that the first draft be submitted by Monday morning, October 1st, , , when do you think IT managers work on their budget?

If you guessed the weekend before the deadline, you are probably right. Most procrastinate and put off the work until the last minute because other things come up. They allow themselves to focus on whatever the “issue of the day” happens to be. If you do not carve out dedicated time to work on your budget, you will spend late nights just before the deadline to do the work.

It won’t be a pain if you have a simple budget process and a few tools to use that help you. In the process I use and that you will learn about in this book, it does not take hours upon hours, , , or days to develop an achievable budget.

In fact, , , it will take less than 20 minutes if you are prepared!!!


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Pareto’s Law, the 80-20 rule, applies here, , , big time. Focus 80% of your time on the 20% of the budget issues that are tangible and you will be fine. Sidebar: Pareto’s Law – also known as the 80-20 rule states, “For many events, roughly 80% of the effects come from 20% of the causes”. Business-management consultant Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed in 1906 that 80% of the land in Italy was owned by 20% of the population. Juran developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas.

Remember me saying there are 8 to 10 accounts that make up most of your IT budget? Do a good job in budgeting these accounts and odds are high that you will be OK.


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Budget Notes List When you work on a budget, you need to focus your mind on one account at a time like Salary or Travel. You can’t work on both accounts at the same time. But what happens is that your mind works much faster than the rest of your body so as you are doing something specific with the Salary account, your mind thinks of an issue that will affect Travel. You can’t stop working on Salary and move immediately over to Travel, , , it’s like programming, , , you have to stay focused or it will take forever to finish the job. However, I’ll bet you can recall a time when you thought of something during the day and needed to do something with the information later, , , but when you were able to use it you could not recall what it was you had thought of. Very frustrating. It happens all the time. If thoughts come to you ‘out of the blue’ about something that should be considered in your budget, write the idea down on a Budget Notes List. I use a pad of paper, but you may want to use the sample template below and included in the Appendix.

Just jot down a reminder so you will remember your “Travel thought” later when you work on Travel. Check each note off the list as you take care of it. At the end of the budgeting process, go through your Budget Notes List to ensure you covered everything you thought of. This allows you to stay focused on the issue you are working on without losing pertinent ideas that come to mind as you work. Do this for a while, and it becomes second nature.


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Time to develop an IT operations budget Before starting, create a worksheet similar to the one shown below. This worksheet becomes the starting point for every account you want to budget. A blank template can be found in the Appendix.

Let me clarify something. In most situations, your Accounting Department will send out budget templates, usually spreadsheets, for you to complete and turn back into them. I’m going to give you several spreadsheet tools in this book. I encourage you to use them, but be aware that your Accounting Department will not accept my spreadsheets. They want their own spreadsheets back from you. What I do is use my tools to prepare a budget draft and then transfer the appropriate data to my Accounting Department’s spreadsheets. It’s simple and faster for me to develop a budget this way. You should use whatever approach is the easiest for you to complete the work. Some of the tools I will show you can be used to track IT assets, , , like IT staff, Wide Area Network circuits, etc. If you are already using a tool to track things that include the current cost of an item like staff salary, it gives you a head start when you start putting budget numbers together. I’ll explain more about this as we work through development of an operations budget. Start developing your operations budget with the biggest part – IT staff expense. You need a staffing plan.


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A. Staffing Plan IT staff expense is the most important part of your budget because staff salary, benefits, and other compensation are typically the largest expense in an IT budget. It can be as much as 50-60% of your total budget so it’s an area where you need to do a good job in forecasting. I’ve often told young managers, “Budget staff expense well, and you’re over 80% there.” I’m about to show you how to develop a staffing plan in just a few minutes, , , it’s easy when you have a process to follow. Break staffing into several parts. Grab the spreadsheet you developed on the previous page and change the title to “Staffing Plan” and the heading “Item” to “Name”. Add a Total Salary row at the bottom. I’ll discuss this part in more detail than some of the rest of the expense categories because it is the most important to have right. Step 1 – Current staff list List your current employees by name within functional groups in the “Name” column of your spreadsheet and don’t forget yourself and your Administrative Assistant. Functional groups are groups of people such as Programmers, Help Desk, Data Center, Infrastructure, etc. You might also list employees by team. The key is to group employee names together that makes it easiest for you to go through your list to ensure you have everyone accounted for. Leave several blank rows in each group for adding new hires to the groups. Step 2 – Current salaries List the current monthly salary of existing employees in the “Jan” (January) column and then replicate the salary across all 12 months. Don’t worry, we will handle salary increases later.

Sidebar: When you budget it is probably October or November if you are on a calendar year. Be sure you update anyone’s salary who will get an increase between now and the end of the year.


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Step 3 – New employees Determine the month you plan to hire each new employee and add a salary to the first column the employee will begin work. Name each employee as New Programmer #1, #2, etc., , , something that helps “New Hires” stand out in your worksheet. IDEA for Budget Notes List: Make a note about, “Recruiting fees for new employees” so you don’t forget. If you hire 3 employees at $40,000 each with a 20% recruiting fee rate, you have a $24,000 expense hit, , , you better have it budgeted. You also want to list staffing positions for “Temporary” or “Part Time” workers you plan to hire, say for special projects, seasonal work or other temporary work. You can choose to list them here or in an entirely separate budget account you set up. Here is what we have done so far:

Step 1 - Listed IT employees by group (team, organization or function) Step 2 - Put in their salary effective January 1 and replicated it across all months Step 3 - Added rows for New Hires and put in expected salaries at time of hire

Your objective is to get to the Total Salary for each month, , , the bottom row. This is the data you will post in your Salary account line of your operating budget. In order to get to these total salary numbers, you have to do the detail work.

There is a simple way to save yourself lots of time on this!


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There is an easy way to save lots of time in setting up your staffing plan worksheet with a simple change management process. Personal Note: If you use a similar spreadsheet to maintain an asset list of all your IT employees and their current salary, setting this up only takes a minute or two. Let me explain. As a CIO, I sign off on every new hire, every salary increase, , , even termination paperwork. Therefore, any change in our IT organization’s staff and their salary comes across my desk. What I do is approve the request and give the paperwork to my Administrative Assistant. She updates our IT Staff spreadsheet which contains current salary, raise date, and other information we want to track for this IT staff asset. When we get ready to start our budget, she gives me the IT Staff asset spreadsheet. I copy a few things to my Staffing Plan worksheet, replicate the salaries across all months, add a few rows in each group for New Hires and I’m done with Steps 1-3. It takes two minutes no matter how many employees we have in the IT organization. Here is the IT Staff assets worksheet I use. It is explained in more detail in my book titled, IT Asset Management: tracking technology assets.


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Step 4 – Employee raises Now, you can build in the employee raises you expect. Companies handle employee raises many different ways so you need to know how your company wants them implemented. There are essentially three ways to budget employee raises:

1. What you expect to happen, , , the month and amount for each employee 2. Set percentage increase for each employee on their expected raise date 3. Raise pool

Remember, budgeting a planned raise for an employee is not necessarily what you will end up doing. Right now, we just want to get the raise money allocated so we can increase salaries as appropriate for each employee in the budget year.

Normally, the CFO or another senior executive will give you a standard raise percentage the company wants to manage employee raises to next year. For example, if your organization has a $2,000,000 annual salary budget and the company gives you a 2% raise guideline, it means you have a raise pool of $40,000 (2% X $2 million).

Your total salary budget would be $2,040,000. Sidebar: You will need to clarify with your company when they say the raise guideline for the year is 2%, 3% or whatever it is. There are two very different ways your company may want this implemented:

a) All raises average 2% b) Manage the total raise dollars for the year to 2% of annual salary

As you can see, the second option has much more money in the “raise pool” for the year. Let me give you an example. In the second option, the total raise dollars handed out would be 2% of your annual salary. In the first option, the total raise dollars for the year would only be half of the second option if all raises were handed out in July. There are three ways to budget employee raises. The simplest way to budget for raises is to use Option 3, the raise pool. Simply add a line item at the bottom of your staffing plan below the Total Salary line called “Raise Pool”. Then add another row titled “Grand Total” Calculate the total raise pool dollars for each month by multiplying each month’s Total Salary dollars by the percentage you have been given. Add the Total Salary row and the Raise Pool row to get to your Grand Total.


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This is what our sample IT Staffing worksheet looks like assuming a 2% raise guideline.

Staffing plan using the “Raise Pool” for determining raises The next easiest way to budget raises is to raise each person’s salary in their planned raise month by the company raise percentage guideline provided to you. Let’s say a Programmer makes $5,000.00 per month, you believe his raise will take place in July, and the raise guideline is 2%, , , his monthly raise amount will be $100.00 per month or $1,200.00 annually. Increase his salary amount in July to $5,100.00 and replicate his salary cells to the right for August through December. The hardest way to budget raises is to determine for each employee when you plan to give him a raise and how much you think it will be. Update your worksheet to reflect each person’s new raise for next year. Check your total raise dollars to ensure you fall within the “raise percentage guideline” the company wants everyone to manage to. This one definitely takes more time. Some of you who are very high detail oriented will prefer this approach because it is more precise. For me, I would rather do something that works and do it in 2 minutes, , , so I use the “Raise Pool” approach. In addition, it is hard to know now what you will actually do in 6 to 8 months when it is time to address an employee’s salary. What’s important is to get the money budgeted.


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Let’s talk about giving out raises to put the budget in context Salary raises are a management tool. You want the ability to award a salary increase based upon performance and an employee’s situation, , , not a flat rate given to everyone in your organization.

You have high performers and you have low performers. In some cases a low performer may not be performing at a level to justify his current salary. If this is the case, I would not give this employee a raise. In another employee case, you may have a very high performer who is actually paid well below what he is worth for some reason or another. You want to reward this employee with a raise above the average, , , he or she is earning every penny. Being able to manage your raises in this way gives you a powerful management tool.

Personal Note: Some companies dictate what your budget for annual raises will be and how you must implement them. For example, I worked for a company once where every employee in the company received a 2.5% raise on January 1st. This, in my mind, is a lazy way to implement raises and takes any semblance of a management tool right out of the manager’s hands. When you develop a budget it is not so important to know exactly what you will do for each employee as it is to ensure you have the dollars built into your plan to cover what you actually end up doing. Other staffing considerations What would you do if you have a senior level Programmer who is not doing the job and you think you might need to replace him? Anticipate the budget implications of terminating an employee who is not performing. To replace an employee, you may need to bring in a new hire two to three months prior to acting because of the critical nature of the position. If you fail to budget for the overlap, you’ve created a budget challenge for yourself that can be avoided. Another example is that maybe you need temporary staff to assist in a major project. Be sure to account for all employees , , , both full time and part time. The point is you need to think through every organization group and each employee position in the groups. The better you develop a real and achievable staffing plan the higher your percentage of achieving your overall plan.


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“Get your staffing plan right and you will be in good shape.” Below is another example of the staffing plan where raises are budgeted at an individual employee level in case you prefer to use this method.

Staffing plan with raises planned for each employee Salary increases have been added (shaded cells) and the additional dollars are reflected in subsequent months. I show you this to illustrate that doing raises this way comes up with a much lower total salary than what we get with the “Raise Pool” approach, , , a difference of $4532.00 in just this small sample. Be sure you know what your company wants and adjust your method as needed to include all the raise dollars you are eligible for. A few notes are worth mentioning here:

- Be certain you have current salary numbers and define expected salary increase months.

- If you aren’t certain about an employee situation, budget conservatively and include buffer. For example, list 3 new hires instead of 2 and start them early.

- At the top left, I include an Excel function “ =NOW() ”. It inserts a time and date stamp which helps you work with the latest update of your spreadsheet.

Believe it or not, the hard part of budgeting is done, , , and if you used my approach, it took all of about ten minutes. One more thing to do with your Staffing Plan worksheet.


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Step 5 – Transfer the salary numbers Take the total salary dollars and transfer them to an IT Department Budget Worksheet. Most companies will provide these worksheets. In some cases, you will actually fill in the employee names into a tool provided to you just as we did in our sample Staffing Plan. In other cases, there won’t be any tools provided from accounting so you will need to develop your own. The material in this publication puts you well ahead of the pack. To facilitate our example, I transferred the IT staff salary budget dollars in our first example to a Master Budget worksheet below, , , the row highlighted in pink.

Sample IT Operating Budget “Master” Worksheet In the tools I give you with this book, this transfer is done automatically. You can create mini-worksheets on any of the budget accounts to develop the detail and automatically post the totals into the Master Budget worksheet.


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B. Benefits Factor & Staff Related Costs Employee benefits are a significant cost in your budget. The good news is that you won’t have to do much to determine what you need to budget for employee benefits. The company’s accounting department will normally give you a factor, or a percentage of salary, to apply and it will be calculated for you. 1. Standard benefit costs Standard benefits are made up of costs the company incurs to cover employee related expenses such as:

- Medical insurance - Dental insurance - Life insurance - Short Term and Long Term Disability insurance - 401K contributions (Company “matching” contribution) - FICA tax (Company portion)

Generally, most companies apply a factor, or a percentage of the salary number to arrive at this budget line item. The accounting department will give you the factor you should use. The key is to be certain you are using the full factor percentage. I’ve seen companies change it during the budget process and managers who aren’t paying attention will budget too low for this account. Employee benefits cost will range from 12% to as much as 20% or more depending upon the benefit package offered by your company. In our example, we will use a 15% factor. To add this to the spreadsheet line for benefits, multiply the salary line by 0.15 to calculate the cost.

Benefits Calculation

The sample excerpt above shows the 15% calculation for benefits of the IT department sample we are developing.


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2. Bonuses and Other Compensation Other compensation includes bonuses, special pay or incentive money you expect to pay. It might also include an auto allowance, club fees, or other perks to attract and retain key employees. I recommend you maintain a separate account for employee bonuses so you see it on the Profit and Loss Report. If your organization is lucky enough to pay key employee bonuses, you need a quick worksheet to define the detail. There are two main types of bonuses, but you might see anything:

a) Annual bonus paid if the company achieves its annual financial plan

b) Quarterly bonus stipend based upon meeting quarterly objectives Annual bonuses are normally paid upon the company completing its Annual Report. If the company achieves its financial plan, bonuses will be paid, , , it can happen any time after the first of a new year and normally by March 31st. The thing to remember is that when you have annual bonus people, the payment will be paid next year based upon this year’s performance, , , so you include bonus dollars for people who are on an annual bonus plan this year. Here is an example of detail put together to quantify an IT organization’s bonuses and special pay budgets. In the example, you will see I used the worksheet to determine the monthly total amounts to budget for Bonus and Special Pay.

Sample Employee Bonus and Special Pay detail The highlighted rows will be transferred to the Master Budget Worksheet.


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3. Recruiting When we added new hires to the IT Staffing Plan for next year, we made a note to include recruiting fees. Do you remember? There are two reasons why you might need to hire a new employee:

a) Fill a new position due to growth or additional need b) Replace an employee who leaves the company

Budget a recruiting fee for every new hire even though you may not use a recruiter for every new hire. This creates budget buffer and when asked for cuts, this is the first place you go to get it. Typical recruiting fees are 15-20% of an employee’s annual salary. I recommend you try to hire new people through your internal employee network. Finding someone through an employee referral can quite often result in a better hire and will be much cheaper. Personal Note: I’ve been with several companies that paid our employees a small recruiting fee of $500 or $1,000 for employee referrals that we ended up hiring. This is good for everyone as long as you stay objective during the interview. We already looked at new positions in the Staffing Plan and if you recall there were three new positions planned. The annual salary for these three positions is $162,000. If we use a 20% of annual salary recruiting fee, it comes to $32,400.

Now, we need to determine the amount of replacement positions. You are going to have employee turnover at some point. People change careers, they move, they just leave or you may even terminate someone. Estimating the amount of turnover you will have depends on where you are in the world, , , some countries have much less turnover than others. In the US, a good estimate is 10-20% of your staff.

Let’s assume you have 20 people on your staff. Using a 10% turnover rate means you will have to replace 2 people. Determine an average salary (we will use $50,000) and multiply it by your standard recruiting fee percentage of 20%. Our recruiting expense for replacements total comes to $20,000. Add the New Hire recruiting expense calculated above of $32,400 and recruiting expenses total $52,400. Add it to your Master Budget Worksheet by spreading the total evenly across the twelve months of your budget, , , or $4366 per month.


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4. Relocation There are several things that may require relocation expense.

- Potential relocation for hiring a new position. You may have to hire from outside your local area.

- Relocation may require temporary living expense as well as moving expenses. - You can set an expense cap at the level you plan to pay. - Anticipate plans within the company that might require employee relocations - Employee career paths might require relocation. - Company acquisition assimilation plans can require relocations.

In our budget example, we will assume two relocations will occur at $20,000 each. You can spread the cost out evenly over the twelve months or put them into the month you think they will occur. I We will place them in May and October.

5. Temporary Labor Temporary labor applies to temporary help you need to supplement project work, peak business times, filling a temporary skill need, or other situations that require going outside the company for the resource. You list temporary labor separately from your full time staff salary because temporary workers usually do not receive benefits. In our example, we will assume there is no temporary work. This concludes the salary or labor related expense items. All of these expenses are normally grouped into a general category group called “labor” so the company can see the cost of its labor force. Companies sometime calculate the total labor cost as a percent of revenue as a gauge to compare with other companies in the same industry for appropriateness. The IT Operating Budget spreadsheet has been updated as shown below:

Labor Related Expense Budget


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Before we leave the IT staff section, there are two more expense categories related directly to your IT staff but both are listed in the Other Expense section. While we are thinking about staff expenses, let’s go ahead and determine our budget needs for these two categories:

- Training and Education - Travel and Entertainment

Each category has a direct relationship to the type of staff you have and will be impacted by the projects and services your staff delivers in the coming year. 6. Training and Education Hopefully, you have developed an IT Training Plan. If not, you should give it some thought because training and education is one of the most powerful motivators you have for IT employees. I show you how to build an IT Training Plan in my book, IT Staff Motivation and Development: build a world class team. There are two ways to budget Training and Education:

a) Budget the cost of each anticipated class b) Budget an annual dollar amount per employee

The second option is the easiest. Take a look at what you have spent in training and education over the past 12 to 24 months and calculate the annual amount per employee you have spent. Analyze next year’s needs and determine how much you want to budget per employee for the year.

If things are running pretty much the same as in the past, I would use the run rate you have been spending plus 10-15%. If you have developed an IT strategy, you should have an idea of specific training classes that will be needed to support your strategy. Most of the time, I use the second option, , , it takes all of 10

minutes. A lot of training is done internally and there won’t be an external cost. You can also use a combination of the two approaches. If you know of certain classes that are going to be taken that have a high cost, list them separately from the average expense per employee calculation. Use a Budget Worksheet to do this so you have a record of your assumptions.


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Distribute the budget dollars over the calendar year however you choose. You can spread the entire Training and Education budget evenly over twelve months. Or, you can spread general Training and Education budget expense evenly over the twelve months and put the big class expenses in the months you expect to spend the money. If you don’t know, budget it early. In the actual year when you are spending money, it helps if you are spending right at your year to date budgeted amount or less than the budget forecast. It reduces your need to explain why you are running behind plan. In our example, we will assume the following:

- $ 1,000 per year per employee (assume 15 employees) - $ 5,000 class in May and also October

For the example, we will take the total of $25,000 and spread it evenly over 12 months. Don’t forget to include your own educational needs as well as your Administrative Assistant’s training needs. Also remember to include publications, magazine subscriptions, and other tools that contribute to the education of yourself and your staff. The Training and Education budget example looks like this:

Training and Education Budget Idea for Budget Notes List: There may be classes that require people to travel to attend them. Be sure to budget the travel expense.


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7. Travel and Entertainment Travel and Entertainment includes travel, hotel, rental car, parking, meals, and other incidental expenses associated with business travel. There are two ways to budget Travel and Entertainment:

a) Monthly estimate based upon past year trends b) By individual

The first approach is quick, , , it simply requires you to review past year travel expenses. Look at the amounts spent each month and the trends. Is travel increasing or decreasing, , , and do you know why? Also note any expense spikes where travel jumps up significantly in a month or two, , , you need to understand why it happened because it may mean something you need to consider when budgeting. If your budget year will be similar to the current year, budget the same plus 10-15% to be safe. Having an IT strategy in place and knowing what your major projects will be is going to help you here, , , another reason for an IT strategy. My approach has always been to budget travel by individual. It doesn’t take very long even if you have a large number of employees reporting to you. Most of your staff probably doesn’t travel that much and the assumptions for those who do will change by position and by individual. To begin, open up a blank Budget Worksheet and list every individual in your staff including yourself. Don’t forget to list new hires who will be coming on board next year. A quick place to pull this list is from your IT Staffing Plan we developed earlier. Idea for Budget Notes List: Check to ensure all expenses associated with New Hire positions are budgeted including Travel, Training, Equipment, Supplies, etc. A reminder, , , as you budget, you are going to think of things you need to include in other parts of the budget. Stay focused to your current issue but add the thought to your Budget Notes List as they come up. Going about your work this way will help you complete your budget in record time and be more thorough.


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Below is a completed travel budget worksheet for the department with assumptions. Take a quick look at it.

Travel Budget Worksheet

Several travel assumptions are needed to budget by individual:

- Average cost per trip - Who will travel and how often - Major events that require travel

Take the total Travel budget numbers calculated in the worksheet above and add them to the IT Operations Budget “Master” Worksheet. One more category finished. Think through each of your expense categories to determine if there are any cost implications from other areas of your support business like projects, special events, etc. Also think through whether each expense category has affect on other expense categories that you might have missed. This concludes the work for expenses that are based upon your IT staff. The rest of the budget categories are expenses the IT department incurs for “non-employee” items.


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C. IT Related Costs in the Company There are a couple of expense accounts that you probably want to include in the IT budget but are used throughout the company. A good example is telecommunications, or “telecom” for data. Other examples are maintenance and software licenses. To see a true picture of “IT expense as a percentage of revenue”, it is easier to get to if you track these expenses in the IT budget. There are several expense categories you may want to consider in this section so we will discuss each:

1. Telecommunications (Data) 2. Telephone (Voice) 3. Hardware maintenance 4. Systems maintenance 5. Software licenses 6. Consulting 7. Supplies

In each section, we will point out forecasting considerations and methods to help you budget each expense category effectively. 1. Telecommunications - Data All data communication costs are normally budgeted and tracked in the IT department for two reasons:

a) IT manages the telecom contracts and negotiates pricing with the vendor. b) IT supports the systems connectivity services, , , the Wide Area Network circuits.

You could split the costs out to each of the company departments that use telecom services for their systems connectivity, but it really isn’t worth doing. Also, because data telecommunications is technology it helps to include the cost in the IT department so you can see the entire technology costs of the company in one place. In a wide area network (WAN) environment, each of the company’s remote locations has a connectivity charge associated with it. There may be more than one type of charge, , , for example, you may use a circuit monitoring service to help you support your WAN.


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You need to identify the total charges for each circuit from your telecom vendor plus any outside network monitoring services that you might use. WAN circuit charges and related support services are typically a fixed fee per month for each circuit you have on the network. If you don’t already have a detailed spreadsheet listing all your company’s remote telecom circuits with their monthly costs, now is the time to create one. Below is an example:

Sample Data Communications Circuit Inventory

For budgeting purposes, you want the total monthly cost. In the example this is $1,825 per month for the small WAN we worked with. There are some points to consider when budgeting for data telecommunications:

- Verify your remote circuits and costs associated with each. - Analyze the next twelve month’s needs that have budget implications:

- New circuits to be added (normal growth, new office openings, etc.) - Existing circuits to delete - Changes in bandwidth (B/W)

- Include potential vendor fee increases or decreases based on planned initiatives. - New circuit installations may have additional costs to plan for such as:

- Consulting installation services - Office wiring and cabling - Router configuration services - Equipment purchases (routers, etc)

Note: Equipment purchases may be included as operating expenses or treated as capital items and depreciated over many months.

- Travel expenses


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The best way to document your budget assumptions is to develop a Telecom Budget Worksheet. As we have before, start with a blank budget worksheet. For illustration, let’s assume the following as we look at next year’s WAN cost:

A. Current circuits in our company include the six circuits from the list above. B. A 128kb circuit will be added in March for a new Miami, Florida office to be

opened in April. The associated installation costs include: - Router equipment - $ 3,500 - Office cabling labor and supplies - $ 2,400 - Travel - $ 1,200

The completed Data Telecommunications budget worksheet looks like this:

Data Telecommunications Budget Worksheet

Transfer the total line to the appropriate IT department’s budget worksheet and you have another step completed. Another 10 minutes to do this if you are managing your WAN information well. Personal Note: As a CIO, I always try to budget expenses in the particular IT department that deals with the associated services the most. Telecommunications is always budgeted in the IT Infrastructure department of my organization. Telecommunications expenses are one of the higher costs in many companies, especially if you have several remote offices in a big Wide Area Network. You need to be thorough in quantifying your existing circuits and phone lines.

If you work with a company with a large Wide Area Network and they cannot produce accurate records of their circuits, , , I guarantee you the company is spending money for telecom services they are not using.


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Companies that do not monitor their telecommunications environment almost always pay for more service than they are using. In twenty years I have never seen it where a company receives more service than what they are paying for. Here is why. Telecommunication vendors do not cancel a data circuit or phone line just because you aren’t using it, , , they only cancel it if you formally request it to be cancelled. They won’t change it unless you tell them to because they don’t know what your plans are. Here is the “gotcha”, , , you can have a circuit in place and pay for it every month for two years and never use it, , , the vendor will keep charging you until you cancel. This basic lack of knowledge about your telecommunications environment costs companies millions every year for services they are not using. Personal Note: This problem is so prevalent that most major cities have consultants who will analyze your telecom situation for free. What happens is they analyze your invoices and WAN utilization to find discrepancies. Once they find circuits that aren’t being used, they work with you and the Vendor to do two things:

a) Recapture money paid for prior year charges where you had no utilization b) Renegotiate your contracts going forward to be more reflective of what your

utilization trends have been They bill you half of what they save your company in recouping past charges plus a percentage of future savings for a period of time, , , usually 1 to 2 years. It’s a real Win-Win. I’ve used this type of consulting service twice after joining a new company and discovering they were not managing their WAN like they should be. If you are new to a company and want to find some “low hanging fruit” cost savings, look at the company’s telecom expenses; you will probably find an opportunity.


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2. Telephone - Voice and Fax Telephone services for voice and fax are a technology service, but IT normally budgets only for these services for the IT organization, not the entire company.

The difference in budgeting for voice telecom versus data telecom is that phone expense is directly related to each department’s usage of long distance service and local phone service. With data telecom, the IT organization has a direct tie to vendors providing the services and an ability to negotiate better pricing. Not so with voice telecom vendors, , , it is usually the local office manager who negotiates these contracts. Once the contracts are set, the monthly costs are normally the same every month for an office.

With telephone expenses, each office can manage its own expense by managing its operation’s usage of long distance phone calls and negotiating price with a local telecom company. Because telephone utilization for cell phones, long distance, fax and other services are managed by department managers for their respective departments, , , phone expenses are usually budgeted by each department for their needs. With the advent of cell phones and fixed long distance packages, both domestic and international, budgeting for phone expense has become much easier than it once was. Now, you need to track the phone plans you have for people in your organization and look at past spending trends to determine if travel causes phone expense to fluctuate in your organization. It is also wise to view past spending trends for spikes, , , a spike is usually an annual or semi-annual payment for maintenance or a phone related type of contract. As with every other expense category, take a look at the last twelve month’s trends and you probably have a good indicator of what to expect in the next twelve months. Start with the trend level you have experienced in the past and adjust future budgeted months by what you know will change the trend. If you are growing as a company, traveling more as a department, adding new people, etc. then your phone expenses are likely to increase.


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Your company may allocate phone expense to your department in any one or more of the following ways:

- Long distance charges - Allocation of the office’s monthly base phone rate for local service and the

options the company uses, , , each department gets a piece of the cost - Allocation of phone system maintenance - Direct charge for installation of new lines for voice and fax services - Direct charge for service charges - Phone handsets - Fax machines

What this means is, , , you have to find out how your organization will be charged for phone and fax expenses in the coming year. Senior management could change it. In your budget worksheet for this category, list each item from the list above that is charged to your department and estimate the costs you expect for the coming year.

You should be able to get a good estimate of the installation costs for new lines and to purchase new handsets, faxes, etc. Use past year experiences and your IT strategy projects planned to gauge the activity you need to cover for next year’s budget. The real expense you need to estimate well is long distance expense. Past month’s expense trend and your insight into future needs plus having a good handle on cell phone rate packages for your team positions you to budget this category effectively.

Personal Note: As a CIO, I have budgeted all phone costs for all of the IT departments in one global department that included my salary. I have also budgeted each of my IT department phone expenses separately. It really boils down to how closely you want to have your IT managers take responsibility for each of their expenses. The larger the IT organization, the more sense it makes to budget phone expenses for each IT department separately. For the budget example we have been developing we will add a monthly budget of $1000 per month for our IT organization’s phone and fax expense . Sidebar: Just because I stated, “Most companies budget phone and fax expenses at the department level.”, , , it does not mean a company will not ask the IT organization to be responsible for the entire company’s phone budget. It rarely happens, but I have seen it handled this way at least once in my career.


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3. Maintenance Maintenance can be reported as several types of expense or all can be combined into one maintenance account in your budget. The three types of maintenance are:

- Hardware - Systems Software (operating systems) - Business Applications Support

In our example budget, we will include all three in one account called “Maintenance”. But first, let’s discuss each type. Hardware Maintenance Computer hardware maintenance should be budgeted in the IT department. I usually include it in my IT Infrastructure organization, the part of the IT team that deals with hardware maintenance the most. Also, budget any maintenance costs related to supporting your company’s network infrastructure and Data Center such as air conditioning maintenance, UPS inspection, etc.

You should have contracts for all your maintenance services. If you don’t, start a list and track all your contracts. One of the key things you will want to review every year for your budget is your maintenance contracts. Review the contract renewal date and terms, , , it might have a budget implication. A sample Maintenance Contract List template is included in the book titled, IT Asset Management: tracking technology assets. Review the expenses incurred in the last year. If there are expense spikes in the expense trend, it usually indicates annual, semi-annual, or quarterly maintenance fees.


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Another reason to maintain a vendor maintenance contract list is to ensure you are getting charged the correct price. You also need to verify the maintenance expenses are being applied to the right budget account. If you aren’t on top of your contracts, you are probably spending more than you should be and it is easy to miss a large expense when you budget for next year. After you develop a list of all your maintenance contracts, step back and look at it from a different perspective. Go through the list of all equipment in the company that should have a maintenance contract and determine if you have a contract for maintaining it. Here are a few considerations for budgeting hardware maintenance:

- Quantify all contracts for hardware and equipment maintenance. - Review contract terms and validate next year’s maintenance cost. - Review past year expense trends to understand the cost makeup, spikes, etc. - If the contract allows a fee increase, budget for the increase. - Anticipate new maintenance contracts when installing new equipment.

The maintenance contract golden rule: If the contract allows for a fee increase, budget the increase and negotiate keeping the fee the same or lowering it. In many cases, you can get a better maintenance price by negotiating the contract or agreeing to a longer term contract. In the budget example, assume a $4,000 per month hardware maintenance expense. Systems Software Maintenance Operating system software can have annual support fees associated with it. Often, the fees are built into the hardware maintenance fees and other times they are split out.

My preference is to bundle maintenance as part of the hardware maintenance for simplicity. As you list all of your hardware maintenance contracts, be sure to include the operating system and utility software maintenance and support costs, if any. In our budget example, we will assume a $500 per month systems software maintenance.


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Business Applications Support You should also have contracts for all your business applications developed by outside vendors. These contracts include the terms of licensing and support of the applications. Each contract should have a provision for renewal terms and limits on support cost increases to support the software.

Another reason you need to maintain a list of all contracts is that you may want to cancel a license at some point. If so, you must understand the termination terms. Many contract terms include an “evergreen” clause where the contract is automatically renewed on the contract anniversary date unless you give the vendor written notice within a certain timeframe, usually 60 or 90 days before the anniversary date.

You might actually have a one or two-year renewal term that you don’t know about. By missing the cancellation notification by one month you may find yourself stuck with the cost of another year, , , or at best a penalty to get out of the contract. It’s important to know your business. Managers who take the time to understand their business will always cost the company less money than those who do not. Some considerations for budgeting business applications support include:

- Anticipate fee increases and budget for it if the contract terms allow it. - Understand renewal terms and put them on a software inventory list. - Anticipate addition of new business applications and their support costs. - Evaluate business applications that charge per user or “per seat” and assess

expense increases or decreases that apply based upon your company growing or shrinking.


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Assume a $5,000 per month business application support expense. Add the hardware maintenance, systems software maintenance, and business applications support numbers and transfer the total to the Maintenance category of your IT Operating Budget Worksheet. The monthly total for the operating budget worksheet becomes:

Hardware Maintenance $ 4,000 Systems Software Maintenance 500 Business Applications Support 5,000

Total Monthly Budget $ 9,500

You probably budget each of these separately, , , I combined them here for simplicity in illustrating the templates. As you step through a budgeting process like I am leading you through, you begin to feel more “in control” of your business because you gain a solid grasp of where and how your organization spends money. Believe me, it will make your business planning go much smoother every year if you follow these guides and use some of the tools. It will also be apparent to the accounting department and other managers that you “have your act together”. Word gets around and it will make a big difference for you, probably more than you might think.


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4. Software Licenses Managing the proper use of third party software in your company should be a very high priority. Software theft is estimated to be in the billions of dollars worldwide and there are stiff penalties for non-compliance.

Throwing in a little humor here is fun but being audited by the Business Software Alliance (BSA) is no fun. It can have major liability exposure for both yourself and the senior management team of your company. I had no idea who the BSA was or that it existed until our company got a phone call from one of its audit reps upon receiving information that our company was in serious violation of software license compliance. I’ll tell you the rest of the story in just a minute. First, let me tell you about the Business Software Alliance.

The Business Software Alliance (BSA) is a trade group established in 1988 to represent a number of the world's largest software makers. Its principal activity is trying to stop copyright infringement of software produced by its members—an activity it claims, using a lost sales metric, to cost the software industry over US$11 billion each year.

BSA is funded through membership dues and through settlements from companies it successfully brings action against.

BSA has financial incentive to find companies who are non-compliant and to go after them to support their member companies. They work aggressively with governments around the world to curtail software piracy.


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Sidebar: An excerpt from the Business Software Alliance’s web site, www.bsa.org, summarizes how serious software non-compliance can be:

Know the law

Many businesses, both large and small, face serious legal risks due to software piracy. Under the law, a company can be held liable for its employees’ actions. If an employee is installing unauthorized software copies on company computers or acquiring illegal software through the Internet, the company can be sued for copyright infringement, even if the company’s management was unaware of the employee’s actions.

Quite simply, to make or download unauthorized copies of software is to break the law, no matter how many copies are involved. Whether you are casually making a few copies for friends, loaning CD’s, distributing and/or downloading pirated software via the Internet, or buying a single software program and then installing it on multiple company computers, you are committing a copyright infringement. If you or your company is caught copying software, you may be held liable under both civil and criminal law.

A company or an individual found using unlicensed software and violating copyright laws can pay damages of up to $150,000 for each software title copied. In addition, the government can criminally prosecute you for copyright infringement. If convicted, you can be fined up to $250,000, or sentenced to five years in jail, or both.

Software piracy is risky business. If you are not compliant, you should budget to get there, , , it is a business continuity risk. What this says is:

A. You need to inventory the software used in your company. B. You need a Software Usage Policy that prohibits illegal use of third party

software in the company. It must be communicated to employees and enforced.


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The BSA doesn’t go around trying to intimidate companies or to hassle you over unintentional minor infringements in software compliance. It’s difficult to be 100% compliant, , , what is important is your intent to be compliant. However, the BSA is serious about finding companies that use software illegally and in correcting the situation for their members, , , companies like Microsoft, Adobe, Apple, Corel, and Dell just to name a few. Fines do not simply force you to buy the software once you get caught; , , there are big penalties as you just read and even possible jail time, , , for the CIO, CFO, CEO and others who steal software. Back to budgeting. Hopefully, you already see a strong need to have a complete list of all software licenses used by your company. Vendors make this easier than they did many years ago. Now, you can buy an enterprise license that gives the company the ability to have a set number of active users accessing the software at any given time. Other approaches allow you to buy blocks of user licenses at a discount. The best way to determine if you are software compliant is to do two things:

a) Run what I call a “sniffer program” that goes throughout your network and itemizes the hardware and software components that access the network.

b) Compare the totals to your vendor contracts Personal Note: I conducted due diligence on a company a few years ago and was happy to find a Hardware and Software report listing every server and PC on the network. It contained hardware configurations plus software installed on each device. In less than 5 minutes I knew the company was non-compliant. For a company of about 500 people, they had over 300 copies of Adobe Acrobat 5.0. I knew they did not have a need for 300+ copies of the full Adobe Acrobat. When I brought it to their attention, they were as surprised as I, , , their intent was to be compliant and completely surprised by what I found. What had happened was the IT staff developed a PC image and Adobe Acrobat was part of what they began installing on every PC they deployed. They removed the full version and replaced it with the Adobe Reader version which is what they thought was already in place.


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To budget software license expense, start by creating a list of third party software licenses just as you did when you listed hardware maintenance contracts. Total the monthly expenses and add these numbers to your IT Operating Budget. Some licenses do not have ongoing license fees but you still need to develop a complete list so you know what you have. Use a “sniffer program” to scan your network and report what’s there, , , they are available in open source format. Next, find all your contracts, inventory what you have and have your Administrative Assistant organize a filing system for them. Finally, match up your contracts with what the “sniffer” report says is installed on your systems. There will be discrepancies, , , possibly dozens of them. In some cases, you may even have to get another contract from your vendor because your files are in such poor shape. This discovery work will take some effort, , , a good Administrative Assistant is worth her weight in gold here. A sample template you can use is provided below and in the Appendix.

Software License Contracts template Once you finally get it all reconciled and you feel like you have a handle on what’s installed, put in a change management process to update your contract file and list when new software is purchased. If you don’t, you will have another mess in six months. Having a list of all the software licenses and enforcing a Third Party Software Usage Policy will protect your company and assist your budgeting efforts every year.


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There are issues to consider when budgeting for business application software licenses: - Look at last year’s expense trend for spikes and be certain you know what

causes them. They are usually annual license renewals or upgrades. - Anticipate increasing or decreasing costs based upon:

- Contract terms - Change in the number of users due to company growth or decline.

- Identify and anticipate new software additions. - If you are not in compliance, budget to get there.

Personal Note: Remember me saying I learned about the Business Software Alliance by getting a phone call from them? Here is the rest of the story.

When conducting due diligence of a company we were planning to acquire, it was very apparent there was considerable amounts of illegal software installed on systems in the new company. They made no secret to the fact they did not believe in paying for multiple copies of a software product, , , and in those days it was easy to simply buy one license and copy it to as many Users as you wanted to.

My due diligence report quantified the issue and included a transition task plus the budget to take care of the problem and become compliant. After the merger was announced, an unhappy employee of the acquired company was terminated and she somehow learned about the Business Software Alliance. Her call was accurate in that the company was stealing software, , , now it is our problem. We got the call from BSA, but when I produced the Due Diligence Report in just a few minutes that itemized the problem and showed an action plan plus budget to correct it, BSA was satisfied. They asked me to send them receipts of our purchases and that was it. Get control of your software licenses. It only takes one disgruntled employee to create a real problem for you over software compliance. For the budget example, we will assume a quarterly expense of $15,500 for Software Licenses based upon the company’s past trends.


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5. Consulting The next section includes consulting services that IT uses for projects, research, or to supplement certain staff needs. This is different from the Temporary Labor category you see in the Salary and Benefits section of the IT Operating Budget.

Typically this category is used for specialty services that you don’t maintain within your staff. For example, you may use a consultant to provide your company with specialized networking skills that you don’t need that often. To budget this category, you need to list all the types of consulting you might need next year or you can take an entirely different approach. Look at the past year’s trend, gauge your business for the new year and assess in your mind how it changes relative to outside consulting needs. If you were spending $40,000 per month on average and you believe that’s about right, keep it at the same level or increase it by $5,000 a month. This is another place where having an IT strategy in place helps because with a strategy you already know what the major projects will be and can gauge whether consultants will be required.

Hopefully, one of the things you are getting from all of this is that the better you prepare up front by getting an IT strategy in place and putting in change management processes that keep your records up to date, , , the easier budgeting becomes. In our budget example we will assume a $20,000 consulting budget for the first six months of the year.

6. Office Supplies Probably the best indicator of supplies need is the trend from the last twelve months. Supplies will include many types of expenditures such as:

- General office supplies - “Off the shelf” software purchases - Small dollar equipment purchases - Printer supplies (Ink, paper, special forms, etc.) - Business cards and “new employee welcome kits”

You may also want to include magazine subscriptions and similar items to this category unless your company tracks them separately. For the budget example we will assume supplies costs will be $1,000 per month.


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7. Miscellaneous Miscellaneous is a catch all for all other expenses. My opinion is that this should be a very small budget item if you use it at all. Most companies have enough expense categories to put every expense to without using Miscellaneous. Personal Note: One indicator to me has always been that any manager who needs to budget a large Miscellaneous forecast probably does not know his business very well. Put it all together and you end up with the Operational Budget shown below:

IT Operating Budget Draft This completes the primary phase of the budgeting process. The only thing left is to review your budget draft and inspect it to be sure you have accounted for everything. We will discuss this in the next section. Hopefully, you are seeing that developing an operating budget should not be as tedious or intimidating as you might think if you are new to the budgeting process. There are many tools available to help you such as the past twelve month trend of your spending. In addition, take advantage of your senior IT managers or your CIO if you need assistance. Everyone has a vested interest in the company achieving plan.


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D. Review Your Operating Budget Draft After completing a draft of your operating budget, you want to do a couple of things to review what you have and determine if you have missed anything. Before we do this, I think it might be worth sharing with you how much time this budget would have taken you to develop. I’ll assume you have an IT strategy in place and change management processes to maintain things like a current IT Staff Roster, a WAN Circuits list, and current Software Licenses Contracts list. The key is to be prepared going into a budget and it will take minimal time. Here is how long each budget account we worked on would have taken to develop a budget draft based upon the methodology I used for them: Budget category Minutes What you need

- Salary 20 IT Staff Roster & IT Strategy - Bonus and Commissions 10 IT Staff Roster - Employee Benefits 1 Benefits factor from Accounting - Recruiting 2 IT Staff Roster - Relocation 5 5-minute think time - Special Pay 5 P&L Trends - Temporary Labor 5 P&L Trends and IT Strategy - Consulting Fees 5 P&L Trends and IT Strategy - Maintenance 10 Maintenance Contract List - Office Supplies 5 P&L Trends - Software Licenses 10 3rd Party Software License List - Telecom – Data 10 WAN Circuit List & IT Strategy - Telephone 5 P&L Trends & IT Strategy - Training and Education 5 P&L Trends & IT Strategy - Travel and Entertainment 5 P&L Trends & IT Strategy

Total time 103 min. If you have what you need, you can blitz through a budget process. If you don’t, you have to do some work to develop an understanding of your business to budget each account, , , and that can take hours and hours. The timeframes I show you above are conservative, , , if you are on top of the financial side of your business


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1. General review The first review I would do is compare your new budget numbers with the past year’s actual expenditures, , , at least 12 months worth. Look at each account and take note of the trend the expense was taking to understand why an account was steady, increasing or declining, , , and whether it will continue into your new budget year. Also look for spikes, , , a month where the expense shoots up for some reason. When you see a spike, dig into it and determine what caused it. It may be an annual payment that can materially affect your total budget dollars for the year. Go back through your Budget Notes list to confirm you have addressed all issues. 2. Top 10 buffer review Take a close look at your Top 10 expense accounts and be certain you have buffer built into them. These accounts can “make or break” your budget so you need to have a bit of “wiggle room” in them to be safe. 3. Project Initiatives review Hopefully, you have an IT strategy in place and have all your key project initiatives identified for next year. If you don’t you need to determine what they are. Need help in strategic planning? Check out my book, IT Strategy: align your IT vision for business value. Let’s look at two examples:

Example 1. Your company recently acquired a new company and you need to assimilate the new company’s technology platform into your company. You determine it will take an additional Programmer and Business Analyst to focus on the business application conversion. We will assume these two resources will be needed full time so we will budget for them in the IT Staff Salary expense category.

Example 2. Another project is identified – Merge three Los Angeles offices into one. Recent acquisition activity has created a situation where we have three operational offices in the same proximity in Los Angeles, California. Our company will reduce several expenses by merging all three offices into one larger facility. This will require existing people who are already budgeted but also extra help in the form of contract workers to prepare the office – cabling, wiring, equipment setup, etc.


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You need to ensure the extra expenses that are not already budgeted are added and become part of your plan. In addition, you will need to show expense decreases that will take place in the IT budget, , , in this case, your Telecom charges will decline when you get the new office up and running and eliminate the original three office locations.

One easy way to document your projects is to use the blank Budget Worksheet again. Add each project as a major category to the worksheet and then list all the expense items and their expenses underneath it.

From the examples I created the following Budget Worksheet. In it, there are five new budget items we need to add to our Operating Budget to account for the two projects.

Project Initiatives

Project 1 – Assimilation project

A. New salary expenses B. Additional Benefits for the two people

Project 2 – Office relocations project

C. Contracted resources, , , put in Temporary Staff or Consulting D. Cabling and wiring supplies for office setup E. Net Telecom shows the difference in expenses and savings for the

Telecom Setup and Telecom decrease rows. Once you have all projects listed with their “extra” expense implications, you should add the expenses to the appropriate category of your Operating Budget Worksheet. You would add the items highlighted to reflect these two project initiatives. Add this worksheet to your working papers so you have a record of what you did. After completing this part, you are all but done. You now have time to do a final review of your plan and to identify key points you want to make when you present your plan.


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4. Risk review You have almost completed your operational budget. Go through each expense budget account to determine if there is risk in achieving the plan. Five important issues are worth mentioning:

a) Look at each budget revenue and expense category and ask yourself, “Is there anything that will cause me to miss this budget?”

b) It is better to be ahead of plan during the year than being behind and having to play “catch up”. Issues may change the dynamics of the company midway into the new year that prevents your ability to catch up. Being a little ahead of plan (more revenue and/or less expense than planned) is a good thing.

c) Insure you have built in the impacts of adding or decreasing staff. Staff related expenses like travel and training can be material.

d) Verify you have all major projects planned for. e) Be conservative in budgeting cost reductions. Cost savings often begin slower

than you initially expect.

At this point, you should only need to identify issues that make a significant difference. If you build buffer into your plan along the way, you should have an achievable budget. Identifying risk is another reason keeping the Budget Notes List is helpful. As you work through the process of developing the plan, hundreds of thoughts “pop” into your head.

Don’t lose these valuable thoughts. Write them down on a napkin and transfer to your budget notes later. Some of the best thoughts may come to you as you drive to work, take a shower, or when you’re having lunch. If you think of something, write it down. Sidebar: You may want to keep an inexpensive handheld recorder or use a phone app to capture thoughts while driving or when it is not convenient to write them down. Check to see if the IT expense as a percent of revenue is consistent with what the company expects. It’s all right for this percentage to increase as long as you can justify it to senior management, , , and they will definitely ask you about it.


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Be prepared to justify every part of your budget. It’s why I continually emphasize the need to develop detailed worksheets and include assumptions to support the numbers. Doing this does several things:

a) Forces the manager to do his homework in developing his plan. b) Helps facilitate the process of developing the expense or revenue budget. c) Provides information that justifies the expense. You will refer back to your

assumptions when you’ve forgotten how you arrived at the numbers. d) Provides information that will be helpful if you are asked to cut expense. The

worksheets will allow you to identify the optional expenses quickly. e) The worksheets provide a “quick start” for next year’s budgeting process.

Budgeting for your operation should not be a laborious challenge. Once you organize yourself and get the full sense of your numbers, it’s easier from then on. Now that you have a process to help you develop a budget, maybe you will find it to be more fun and rewarding. There really is no excuse for not having a financial understanding of your operation. It can open up more doors for your career because senior managers want and need IT managers who understand the business side as much as the technical side. We have completed the Operating Budget part of your business plan. Now it’s time to focus on another important part of business planning, the Capital Budget. Personal Note: A gratifying thing to see is a young manager take your lead and run with a new concept. I picked up responsibility for an IT organization that had revenue and expense responsibility in the late 80’s. The group had never made a profit during the previous five years. When the young manager brought me his budget, I rejected it. He was too conservative and was close enough to achieve a profit. I sent him back with one comment. “Bring it back when you can achieve a profit, , , 5 years is long enough to be profitable.” I approved his next version and he even beat the revised plan. It was a big deal for him, his staff, and senior management. It was important for his growth, important for staff morale, and the company deserved it as well. I was also pleased.


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IV. IT Capital Budget A Capital Budget is a forecast of major expenditures for equipment and products that are considered investments for the company, , , investments that improve productivity or increase sales and earnings. A capital expenditure cost can be spread across many months, usually from 36 to 60 months as opposed to the total cost having to be reported in the month of purchase. This allows the cost to be spread over the “life” of the item. The method of determining the period of time an item can be depreciated is based upon accounting guidelines defined by your government’s tax division. Capital item depreciation expense hits the company’s Profit & Loss Statement just like operating expenses do. The difference is that operating expenses are reported above the Operating Income line, often called EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization). Depreciation is reported below the EBITDA line just like taxes and amortization.. Operating expenses are considered “manageable expenses”. A manager can do things to impact the level of travel and training expense, but he can’t manage the depreciation expense that will be reported, , , hence “above the line” and “below the line” Two options for recognizing capital purchase expense A company can expense the full amount of a $200,000 computer system in the same month it is purchased if senior management chooses to. If they do, the P&L has the entire $200,000 expense reflected in that month which reduces profit by $200,000.

Or, the company can depreciate the equipment over five years (60 months). If the company buys the equipment on January 1st and chooses the depreciation method, only $40,000 hits the P&L for the year, , , because 1/60th of $200,000 is “depreciated” every month for 5 years. Profit for the year is $160,000 higher as a result.

Depreciating equipment allows you to report higher earnings for that year. It is legitimate because you are depreciating the cost over the life of the equipment. Wow, why wouldn’t everyone want to depreciate versus expensing the entire amount? While depreciating does improve the first year earnings picture, it also builds up a “mortgage” of financial liability for future years that has to be accounted for.


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The nice thing is that acceptable accounting practices give your company flexibility. One thing accounting rules don’t give you is flexibility on payment. Unless you arrange for some type of lease, the equipment has to be paid for. Cash flow is a third consideration your company has to consider when buying equipment. To develop a capital budget, you need a new budget template. A Capital Budget template is different from an Operating Budget template. When you look at capital purchases in building a business plan, you need to consider four things:

1. What 2. When 3. Cost 4. Department

Capital Budget Template Data fields: Item Capital item to be purchased Month Planned Month purchase is planned Cost Estimated cost Dept. Department planning to purchase the item Comments/Justification Comments and justification Building a spreadsheet in this manner allows you to sort by department or by the month the cost will be incurred. The completed capital budget becomes a valuable tool to monitor and manage the company’s capital expenditures in the coming year.


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There are many different items that fall into a company’s capital budget plan including: - Computer equipment - Phone equipment - Equipment to support operations - Computer software - Office equipment - Office furniture - New office fixtures - Vehicles - Company signs - Even projects can be depreciated

For our purpose here, we will focus on capital items that relate to technology. Personal Note: Companies usually set a price threshold to be the level of expense that warrants listing an item as a capital item. I’ve seen as low as $500.00 (anything $500.00 and above that could be considered a capital item was depreciated) and as high as $5,000. Again, your company has certain flexibility in how they can handle and report capital items. The CIO of the company should be involved in reviewing and approving capital purchases of technology across the company. The main reason is to standardize the technology so the company can leverage purchases and create a stable environment. In addition, support costs are normally lower when you deal with standard equipment. If the IT department is involved in setting standards and approving purchases of technology, there will be two components that affect a capital budget:

- IT Capital Plans - Non-IT Department Plans

First, let’s focus on the IT department’s capital needs for the coming year.

Before we do, let me repeat something. The CEO and CFO will determine how aggressive the company plans to depreciate capital items and what level of cost an item has to be to be considered a depreciable item. These two managers are essentially the custodians of the Profit and Loss Report and accountable to the owners of the company. What this means is that the CIO must be aware of how senior management plans to manage and account for the purchases of equipment as it will affect how you budget.


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A. IT Capital Plans The steps that follow will help you develop a capital budget for your IT department. Step 1. Start by listing every activity you can think of that has a capital purchase requirement. The following list is examples of such activities. There are many others.

- Project initiatives - New staff - Office openings or moves - Expanding the company network - Adding new IT services - System upgrades - Achieving software compliance - Consulting expenses for certain company initiatives (Be careful not to include

consulting dollars in both the capital budget and the operational budget.) Here is a list of typical capital purchases for you to think about:

- PC’s, printers, and peripherals over $500, or whatever your company level is - Telecom equipment (routers, etc.) - Phone systems - Office Furniture - Major software purchases - Servers - UPS, generators, etc. - Air conditioning units

Step 2. Define each capital item you must purchase for each of the activities you listed in Step 1 and add it to the Capital Budget Worksheet. For example, you would have listed “New Hires” as an activity. Your operating budget has a set of assumptions for how many new hires you are planning for and when. You should also develop an assumption for the cost of new equipment, furniture, etc. for every new IT employee you bring into to the company. In fact, a good idea is to walk through all of your operating budget assumptions to determine if there are capital purchase requirements. The assumptions will help you think of the projects and the activities that you plan to undertake next year.

If you like, group items by project or activity to help you associate them to your action plans and strategy.


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Step 3. Add estimated dollar amounts for each item. The IT department should have a standard price for PC’s, printers and the normal items that are bought. For unique items or those that you don’t have a proposal for, put in your best estimate. If senior management wants more precise cost estimates, then you may have to do more work. In most cases, they will probably take your best estimates. Be conservative with your numbers, especially with large dollar items. It is better to be slightly high on your cost estimate than too low.

A few considerations for estimating capital item costs include:

- Don’t forget installation costs for new equipment, software, shipping, insurance, etc. You can include consulting and professional services if you haven’t already included them in the operating budget.

- Add annual maintenance dollars that have to be added to the purchase of new equipment.

- Don’t overlap items in the Capital Budget and the Operating Budget. - Include system upgrades. - Office moves and consolidations may require equipment overlap to prevent

users from having downtime. - Use standard costs for items that the company purchases often.

Step 4. Add the month in which you believe the purchase will be made and identify the IT department that will be using the item (Infrastructure, Help Desk, etc.). Add any special comments and justification information that helps you remember things about the item or explains it to others. That’s all there is to developing your IT department’s capital budget. The CIO will pull each of the IT department budgets together to create a Capital Budget for the entire IT organization.


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B. Non-IT Department Plans All departments of the company should submit a capital expenditure budget for the company’s new business plan. The IT department should review the items to insure they fit within the company’s technology strategy. There may be items that were left out unintentionally and the CIO or IT manager reviewing it can identify these items so they are included in the final budget. There is a valuable benefit in being able to review each of the non-IT department manager capital budgets, , , it is a great source of information. Let me explain, , , let’s assume you discover in the California manager’s capital budget a set of new office furniture as you glance through his list of capital requests planned for next year. If he is ordering new furniture, one of two things is going on:

1. They are replacing furniture in an office 2. They are opening a new office

If a new office is opening, guess what? We have quite a lot of IT support work to do to help make it happen, , , things like:

1. Cable and wire the new office 2. Order and install new PC’s, printers, faxes and phone systems 3. Establish data telecom connectivity 4. Set up new users on the network, , , add them to email, , , give them access to

business applications 5. Provide training support

By learning about it during budget time, it gives us plenty of time to prepare and plan the IT support we will need to provide, , , plus ensure we have everything in the Capital Budget that needs to be in it. Not only that, our IT organization will have quite a bit of travel expense to support an office opening so we need to add morel travel expense to our operating budget. Lots of implications to our IT organization by discovering a manager is ordering new furniture. If we don’t learn about this new office early, we may hear about it late and lack the time we need to prepare properly, , , managers sometimes forget to tell us thinking we must already know about their plans to open a new office.


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C. Capital Request and Approval Process A key part of managing capital expenditures is putting a capital request and approval process into effect. Most processes I’ve seen are simple:

1. Spending level guidelines are set up 2. Approval authority and process is created 3. A capital request procedure is defined

A form is usually used that requires the requestor, normally a manager or supervisor, to quantify and justify the purchase. Even though a capital item was budgeted and approved with the final business plan, it does not mean that every item should be purchased. Company dynamics change and some items will be passed up while others that were not identified will be needed. Let me explain more. For operating expenses like travel and training, , , once it is approved managers can spend money for these things without getting a confirmation approval when it comes time to spend the money. The only exception is usually for salary, , , when a manager wants to hire someone, he generally has to get confirmation approval from a senior manager before he can hire a new employee even though the new hire was approved with his budget. The reason is because salary is an expensive and ongoing cost. Business issues change so a CIO wants the ability to confirm we still need that new hire before his young manager pulls the hiring trigger. The same thing exists for capital items. Most senior managers want the ability to “revisit” the purchase of a piece of equipment costing thousands of dollars, , , just to be sure it is still what we need to do. A Capital Request and Approval Form is submitted by the requesting manager and routed through the appropriate levels of the company for approval based upon the approval authority that has been set up. Each capital request should be justified even though it was originally approved in the business plan. Approval levels vary from company to company. The CIO will have a defined limit where he can approve a capital request on his own. Some levels may require two signatures of the top 4 executives in the company, , , it depends upon how tight senior management wants to manage capital spending. A sample Capital Request and Approval Form is included on the next page.


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Capital Request and Approval Form


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V. Presenting Your Plan Presenting your business plan requires you to understand your numbers very well. It’s hard to answer questions if you don’t understand what’s beneath the numbers. This is why you have been encouraged throughout this book to document your assumptions. If you present your plan to the CIO or another senior manager, you need a few things:

- Operating Budget - Capital Budget - Assumptions to major expense and revenue accounts - Key projects, initiatives, and points that justify the plan - Reasoning behind material revenue or expense trend changes - Risks - Critical factors necessary to achieve the plan

Organize your materials in a way that helps you move through the key points systematically and remember who the audience is. Most senior managers do not want or need to know the details of every expense account, especially if they are not material in size. Stay with the high points and remember the 80-20 Rule. Questions a senior manager might ask include:

- Will you make this plan? - Where are the risks that prevent you from making the plan? - Can you do more with less expense? - Why do you think it’s an achievable plan? - What are the critical factors necessary to achieving your plan? - Are there areas where you can leverage your expense? - Are there things we should be doing to leverage our operations?

The key to a successful meeting is knowing your material and the numbers. It’s your plan so know it very well. Want to know the best way to dodge the arrows? Do your homework and understand the details of your plan. If you don’t, your senior managers will be able to tell and it will likely be a difficult meeting.


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VI. Monitoring the Plan

After you have developed the budgets and now have your business plan approved, you need to take steps to ensure you achieve your plan. Take ownership of your plan, , , it’s yours to make or break. Those who achieve plan are looked on more favorably. You should be receiving company Profit & Loss Statements (P&L) every month for your area of responsibility. If you do not, find out how to start getting them. The P&L Statement is actually two reports:

1. P&L Variance Report - Current month and Year to Date actual versus budget variance

2. P&L Trend Report - Monthly trend of your revenue and expenses Both parts are important in different ways. P&L Variance Report The first report is a comparison of what actually happened compared to what you budgeted for the most recent month and year to date (YTD). It tells you where you stand compared to your Operating Budget.

I tend to look at the Year to Date (YTD) Variance to see how we are tracking overall compared to the budget for this period of time. If we are in good shape, I don’t analyze it very much. If we are getting tight or maybe falling a bit behind budget, then I start looking through the numbers and analyze the Trend Report to see what’s going on and what we need to do to stay in control of our financial plan.


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P&L Trend Report The second report is a Monthly Trend Report that shows the actual expense and revenue month by month in the current budget year so you can see how things are trending. Very helpful to see this.

Looking at the trends helps you evaluate whether key expense or revenue accounts are tracking as needed to make your plan. It tells you where the financial picture is headed. You should also look at the detail that supports each account. The detail transactions that occurred in a month are reported in a report called the General Journal Report or sometimes called the General Ledger Report. Let me explain using the Travel account. In your P&L reports, you see the total travel that occurred for the most recent month and Year to Date. It’s a summary total of all travel that occurred in your department. Well, you may have had 10 people travel on a dozen or more trips throughout the month of January. Using the report example above you see their combined total of $12,200 in travel expense for January. Each employee submits a Travel Expense Report to get reimbursed and that’s how their travel expense gets put into the General Ledger and reported on the P&L. A detail General Journal Report shows all Travel transactions (Expense Reports in this case) that made up the $12,200 total Travel expense for January. If you do not reconcile your department’s financial numbers, your expenses will always be higher if a mistake has been made. It never works out in your favor. Honest mistakes are made and journal entries are posted to wrong accounts and to the wrong departments, , , if there is a mistake on your cost center it is always against you. Owning your P&L means taking charge of understanding everything that hits your P&L. The earlier in your career you begin to learn the dynamics of the financials of a company the stronger manager you become.

After a while, you will be able to review your financial reports quickly, reconcile your questions with Accounting and forecast your department’s financial future.


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Summary

Budgeting for an IT organization does not need to be difficult nor does it need to take lots of time. The key is to have:

- A simple process to follow - Tools that help - Insight about how to think about major IT expense categories

It is important to develop a budget you can achieve, , , you want to build a reputation that your team always delivers what you say you will do within the cost of what you say it will cost. Predictability is a key component to IT success and being able to understand the financial aspects of your business means quite a lot to the senior managers of your company, , , the CFO and CEO. In order to do things within the budget you create, you must be conservative. There are two golden rules in IT:

1) IT projects take longer and cost more than you think!

2) Surprises happen, , , and they are

usually negative for an IT organization To be conservative you need to include budget buffers in your plan so that you are covered when a surprise happens or a project takes longer than expected. Understand your budget numbers and the assumptions you used to arrive at your numbers. Document the plan and your budget effort next year will be even easier.


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Appendix A Budget Worksheet


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Appendix B Sample Staffing Plan Worksheet


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Appendix C Department Budget Template


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Appendix D Budget Notes List


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Appendix E Data Telecommunications Circuit Inventory


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Appendix F Software License Template


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Appendix G Capital Budget Template


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Appendix H IT Major Projects List

IT Major Projects List

Project/Initiative

Timeframe Length of Time

IT Resource Needs

Other Cost

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20


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Notes

The Practical IT Manager GOLD Series of books and tools will help you manage your IT organization better. The processes and tools discussed in these publications are used by thousands of IT managers around the world to achieve more success. The series includes the following titles and more: - IT Management-101: fundamentals to achieve more™ - IT Assessment: the key to IT success - IT Strategy: align your IT vision for business value - IT Project Management: a practical approach - IT Asset Management: tracking technology assets - IT Organization: right-size your organization for success - IT Staff Motivation and Development: build a world class team - IT Budgeting: operational and capital budgeting made easy - IT Due Diligence: merger & acquisition discovery process - IT Assimilation: consolidating redundant technologies - What To Look For in a CIO: get more value from your IT investment

MDE Enterprises, Inc. “helping IT managers of the world achieve more success”

www.itmanagerinstitute.com

“Every aspiring IT manager will, without question, benefit from your work.” Bryn Thomas - Philadelphia, PA “I am so thrilled to find a resource that addresses my needs as an IT executive. I’ve been looking for something like this for years.” Charise Simpson - San Diego, CA “Your publications get to the heart of IT management and provide practical examples not found in other books.” Dan Tankersley - Paducah, KY “The value of the materials is excellent and can be used by any manager in any field, even outside of IT.” Kenneth Wakati - Dar es Salaam, Tanzania “Mike’s experiences offer valuable insights on how to build an effective IT organization that can truly make a difference.” Judy Campbell - Austin, TX

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