This article originally appeared on our sister site, TechRepublic.
When midyear arrives and you’re trying to figure out how you can already be over budget, you can rest assured that you aren’t the only IT manager who has no hope of rectifying the budget by year's end. For a number of reasons, IT managers often fail to hit their budgets, but it doesn’t have to be that way.
Here are some of the more common reasons that IT managers put together weak or unrealistic budgets, along with numerous tips on how you should go about creating your budget and what it must include to make sure you aren’t sweating it by year’s end.
Reasons budgets are missed
Here are the primary reasons managers miss their budgets:
- Managers don't know how to budget: For the most part, IT managers aren’t taught how to budget. Budgeting is one of the least-liked aspects of running an organization, especially for a technically oriented person, so it doesn’t get a lot of attention.
- Managers don't understand the financial aspects of their businesses: Too many managers don’t take the time to review and understand the financial dynamics of their businesses. In most cases, there are only a half-dozen budget categories that tend to make or break you in any given year.
- Managers don't make the proper effort: Because most of us hate to budget, too many of us don’t make the effort to gather the information we need to develop an effective and achievable budget.
- Managers want to turn in "desirable" budgets: The scenario goes like this: The CEO asks for the budget and expects it to include many of the project initiatives discussed in various meetings. Once the first draft is submitted, the CEO asks for a reduction of expenses by most departments while trying to get the overall budget in line for the Board of Directors. Budget “tweaking” is normal. The problem exists when the manager cuts expenses but doesn’t reestablish expectations of what services or deliverables have to be cut to achieve the new plan. Fail to realign expectations at this juncture, and you are a “sitting duck.”
- Managers submit "perfect" budgets: This occurs when managers do their level best to submit a budget that’s perfect. They spend hours gathering the details for all the projects, go through exact calculations for salaries, increases, and benefits for their staff, detail every new project planned for the new year, and submit a budget that is “exact.” The problem is that a budget is a forecast and should not be so exact that there’s no room for error. “Perfect” budgets are almost never achieved.
- Managers fail to manage expectations throughout the year: It’s normal for companies to alter plans during the course of the year. Too many managers sign up for the new business needs but fail to adjust senior management’s expectations on the impact those new needs will have on the original business plan. Unless you tell senior management otherwise, you’ll be expected to complete the new initiatives, as well as the original plan, all within the original budget. It’s your job to manage senior management’s expectations.
A few tips that can save the year
Developing aggressive, but achievable, budgets is easier than you might think. It requires that you anticipate surprises and build in buffers to offset them. Here are the items you can’t afford to leave out of your budget.
Salary and benefits are key
In most IT organizations, staff payroll expenses make up about 70 percent of the budget. Get this piece right, and you’re well on your way to building an achievable budget.
- Get your headcount right: Budget all employees, open positions, and planned new hires for every month you expect to pay the wages.
- Plan salary increases: Budget the salary increases you plan to make for each member of your staff.
- Contract help may be a big expense: Pay close attention to contracted employees and consultant expenses; these costs can run up quickly.
- Don't forget recruiting expenses for new hires and replacements: Recruiting is expensive.
Telecommunications costs are dynamic
In many organizations, telecommunications costs to support remote office connectivity can be dynamic, especially if offices are opening and closing every month. Do your homework and build in a reasonable growth and activity plan that coincides with senior management expectations.
Hardware and software maintenance
Annual software maintenance fees should not be a surprise. Neither should fee increases for hardware maintenance, etc. Be sure you maintain an accurate asset list that helps you budget the proper amounts to avoid any surprises and review contract terms for planned increases.
Travel and entertainment
You should know who travels and who doesn’t. It doesn’t take a rocket scientist to estimate the number of trips per month by all those who need to travel. Take the trips per month and apply an average cost per trip to arrive at each month’s budgeted expense amount.
I usually take a fixed-expense dollar factor and multiply it by the number of employees, then divide it evenly over the 12 months. If you know of large training expense items, you can budget them individually for the month when you expect to spend the money.
Compare the new plan to past trends
Past operating expense trends can tell you a lot. Use them as a source to find expense peaks and to validate your new plan.
Plan for major project initiatives
New projects may have significant costs associated with them. Be sure to include these in your new budget.
Investigate company plans
Ask around and determine whether there are major initiatives planned that will have an impact on your budget. If you discover something, build in a reserve to handle it as necessary. If you have profit and loss (P&L) responsibility, you’re expected to prepare for initiatives that have a cost impact on your organization.
There’s nothing wrong with building a conservative budget that allows you to achieve your financial plan. In fact, your senior management team wants a plan that can be achieved. The Board of Directors looks for IT executives who deliver what they say they will, and over half of the measurement is in delivering the financial numbers. Therefore, it is totally reasonable that your CEO expects you to build a plan that is aggressive but that you can and will achieve.
Don't sandbag your budget
It’s just as bad for managers to intentionally sandbag their budgets to ensure they make their budgets as it is to budget too tightly and fail to make the plan. Budgets should be aggressive but realistic to achieve. When a manager lowballs the plan by 30 percent to ensure there is plenty of room, it usually takes away some initiatives that senior management would like to plan for in other areas. The image you want to shoot for is of a manager who understands the business and budgets aggressively but has safety valves in place for unforeseen circumstances in key areas. And by all means, you want to be seen by everyone as a manager who always achieves your plan.