IT Manager's Handbook: Getting Your New Job Done (41 page)

Although chargebacks don't alter the budgeting process dramatically, they may have an impact on how you approach it.

Reviewers for Your Budget

Most likely you'll be reviewing the first drafts of your budget with your director or vice president. In general, it's a good idea to get as many eyes and minds involved with your budget as possible. You don't want to overlook anything. This includes getting your direct reports involved in the process. Solicit from them ideas about projects they know about, things they'd like to get done, hardware and software that needs to be replaced or upgraded, and so on.

In all likelihood, involving your staff in the budget process will benefit both of you—not only will they appreciate the opportunity to be involved, they will most likely offer up some items that you had neglected to think about. At the same time you're collecting the expected dollar amounts for your budget, you want to make sure you're collecting the associated explanations and justifications. You will have to refer to this information when it comes time to explain, justify, and defend your budget. See the section later in this chapter entitled
“Getting Approval and Defending Your Budget”
on
page 165
.

Try to keep as much detailed information as possible, not just high-level summaries. For example, instead of putting $500K in software maintenance, identify the various applications that you pay maintenance for, how much the maintenance is, and when the maintenance comes up for renewal. Having this information readily available makes it that much easier if you are asked to explain your budget. Also, it helps identify those items that should be removed from the budget because they are no longer in use.

You need to thoroughly understand and know your material before making a formal presentation. You should be fully versed in how you came up with your numbers, what assumptions were used, and so on. Many managers, IT and non-IT alike, don't do their homework before making a formal budget presentation. This lack of preparation clearly shows during the meetings. The more knowledgeable you are, the more confidence they'll have in what you say.

In general, the budget may be approved by your CFO or executive committee around the start of the fiscal year. However, it's not unheard of for the final approval to be delayed until a month or two into the new fiscal year.

Estimating (and Overestimating) Your Numbers

It's general practice to overestimate your budget to a certain degree. While this style sounds questionable from a practical and ethical perspective, it's so widely practiced and accepted that you need to address the issue directly when you present your budget. Most experienced managers expect an overestimation.

It's important to understand that the practice of overestimating is very common and well understood by both sides. If you consciously do
not
overestimate (and many managers don't), make a point of bringing this up during budget discussions with your supervisors.

There are several reasons for overestimating:

•
It gives you room to cut if upper management asks to reduce spending.

•
It gives you room for those unanticipated expenses that invariably crop up.

•
It increases the likelihood that you'll be within budget for the year, which could be a critical factor in determining your bonus or merit increase.

Of course, the downside of overestimating your budget is that if you don't use all the money allocated to your department, you may not get approval for such a large budget in future years. A large surplus may also give the impressions that you don't do a good job of planning. Very often, the end of the budget year has department managers either shifting some of next year's purchases into this year's budget (trying to use up unspent funds) or shifting some of this year's purchases into next year's budget (trying to avoid going over their budget).

Getting Approval and Defending Your Budget

As you work to develop your budget, it is likely that you'll have to present it or defend it in some manner. While there may be great temptation to review each item line by line, this isn't a common practice. Summaries are generally the expected norm for discussions with management and the finance department, but have the details ready in case you need them.

You'll probably have to give a high-level overview of your budget to your superiors—using more words than numbers. You may end up presenting this to your manager, to Accounting, or to some sort of company budgeting committee. You'll be better off couching these explanations in business terms, as opposed to IT terms. Don't try to explain why three programmers are needed for the Web analytics project. Instead, explain the value of delivering the project to the company in time for the holiday shopping period, and that the cost of the programmers is the means to that end.

Also, be prepared to explain how budget reductions will impact various goals and projects. For example, a time frame for a project may need to be extended or functionality will be sacrificed. (See the section
“Three Critical Components to Any Project”
in
Chapter 4, Project Management
on
page 111
about “ … the
interplay
of the three characteristics of a project—time, money, resources … .”)

It may be appropriate to make references to last year's budget and projects as a comparison. You should also be prepared to explain large variances from year to year. For example, if you're queried as to why you're expecting a 25 percent increase in supplies, you can explain that the new document imaging system will greatly increase the amount of data that is stored online and has to be backed up so you'll need to buy more tapes. When presenting your budget, not only are you providing information and letting your audience see what they're getting for their money, you're also trying to make them feel confident in your abilities.

Remember to keep in mind that you are probably presenting to an audience who has little understanding of the technical details behind your job and your budget. They don't know the difference between a mega
bit
and a mega
byte
—and they don't want to know. That is your job. In your budget presentation, act as you always do when presenting to a nontechnical audience: recognize they are experts in their own field who deserve respect from a fellow professional. You don't like being demeaned because you don't know what an “indemnification clause” is when Legal mentions it, so don't demean non-ITers because they ask what a KVM switch is.

Don't be surprised if your budget goes through several iterations. The powers that be may kick it back and ask for reductions or more explanation. You may be asked to eliminate certain projects so that those costs can be recovered or you may simply be asked to reduce it by a fixed amount or percentage. If so, be sure that you explain the consequences of those reductions.

During the Year: Tracking and Revising Your Budget

During the year, your Accounting department will probably furnish monthly or quarterly reports of your department's year-to-date spending. Look closely at these reports. It's not uncommon for data entry errors to occur where another department's purchase is charged to your cost center or for one of your own purchases to be charged to the wrong category.

The report you get from Accounting will probably have several columns for each category:

•
Budgeted amount

•
Actual amount spent for the month

•
Actual amount spent year to date

•
Variance against budget (an over/under amount indicating how well you are doing compared to the expected amount based on your original budget)

•
Variance against last year (an over/under amount indicating if you are spending more or less for the same items as last year)

Your Accounting department may be able to give you reports with different formats based on your needs. Detailed reports can usually be requested if you have questions about information in summary reports. But don't get too caught up watching pennies. As a general rule, your primary concern is the total budget for your department. If your overall spend is well under budget, no one is likely to care if you overspent within the supplies category, for example.

Revising Your Budget

During the year, you may have one or two opportunities to revise your budget. These revisions are often referred to as forecasts, reforecasts, revised estimates, or updates. These revisions can be used to:

•
Include projects that weren't expected during the initial budgeting process.

•
Eliminate or reduce costs for projects that were canceled or scaled down since the initial budget was proposed.

•
Update/refine projections based on actual spending and other changes (e.g., vendor pricing, expansion, size of projects).

•
Demonstrate anticipated cost reduction as a result of belt tightening.

Each opportunity to revise the budget is a chance to deliver a more accurate estimate. Your initial budget is essentially a 12-month projection. However, a midyear revision is 6 months of actual costs and only 6 months of projection.

6.2 The Difference between Capital Expenditures and Operating
Expense Items

A budget usually consists of two sets of numbers: one for
capital expenditures
and one for operating expenses. Typically, these are considered separately, with different amounts of scrutiny. IT is a bit of an odd duck department in the budgeting process in that it usually has a significant capital budget. After all, most of the traditional corporate departments (Marketing, Finance, HR, etc.) usually don't have much need for acquiring assets.

•
Whenever you spend money on something, you'll have to consider if an item is a capitalized or operating expense so that it can be treated accordingly in the accounting process. A capital expenditure is for an item that will have a useful life of several years, such as a piece of hardware. Examples of capital expenses would include most hardware, software, Enterprise Resource Planning (ERP) solutions, furniture, physical plant items (e.g., cabling, data center cabinets), and so on.

•
Alternatively, an operating expense item is something whose value is gone in a shorter period of time. Operating expenses are the cost of resources used to support the ongoing operations of a business. They often recur, in that they have to be paid each month or quarter (e.g., the electric bill or salaries). Operating expenses are for items that last for a short time and have no residual value after that period. Examples of operating expenses would include salaries, telecom lines, software and hardware maintenance agreements, equipment rentals, etc. A software support agreement, for example, is an operating expense item. The value of the money spent each year lasts only for the 12 months of the agreement.

Capital Expenditure Details

If the useful life of a $10,000 router is expected to be five years, accounting principles of capital depreciation allow you to spread the cost over the life of the equipment—in this case five years. So, even though the company may have to write a check for the full amount when it buys the equipment, the impact of this purchase on the company's books, and your department's budget, may only be $2,000 that first year and in each of the subsequent four years of the device's expected life.

Because there is more paperwork involved in tracking a capitalized expense for each year of its useful life, there is generally a minimum dollar amount for capitalizing items. For example, a computer cable might be useful for 10 years, but because it only costs $25, it would not be capitalized. The minimum amount for capitalizing varies from company to company. Figures of $500, $1,000, or $1,500 are common—check with your Accounting department.

Although the useful life of a connection to the Internet might seem to be quite long, in reality its useful life is only as long as your last payment to the carrier. Stop paying the carrier and its life drops to zero. Since you're really just renting it from the carrier, it can't be considered an asset on the books of your organization.

Check with Your Company's Policies

You'll do yourself a big favor by checking with your Accounting and Finance departments to get an understanding of your company's policies regarding capital expenditures, depreciation schedules, and so on. Armed with this, it's within your best interest to group projects' costs into three categories: capital expenditures, expense items, and any recurring costs that will continue after the project is completed (e.g., maintenance contracts, telecommunication costs, etc.).

Gray Areas

There are several gray areas regarding capital and expense items. Typically, assets are tangible items. However, software and applications aren't things you can touch. There used to be a lot of variance in the treatment of software costs, but now it is generally capitalized—but not always. Some organizations will capitalize a vendor's consulting services if they're bundled with the sale of hardware. Similarly, there may be justification to capitalizing the staff salaries, or training, associated with a particular project.

Interpreting accounting regulations can be as difficult as interpreting any other legalese. It's always best to check with the experts. For accounting issues, the experts are your Accounting department.

Another issue related to the consideration of capital versus operating expense is your company's sensitivity to each. Some companies are particularly sensitive to capital expenditures, whereas others are more sensitive to operating costs. You probably won't find any official statement or policy about this, but you're likely to get a sense of it fairly quickly.