As we get into the holiday season, there’s a good chance
that you’re winding up — or are running late on — your annual budget for 2014.
So I’m going to share several strategies to consider when looking at the
general task of budgeting for an IT department, whether your process is highly
structured or more flexible. Some of these ideas are useful when you’re working
on a formal budget; others are best practices for use year-round and, once in
place, will make the annual chore much easier.

You can also download the Excel template I use for our budget. There are tabs for
the detailed line items and liberal use of pivot tables to show different views
of the information, including a calendar of spending. The download includes a sample spreadsheet with the various
categories filled in to serve as a model.

Look at budgeting from the owner’s perspective

This item is by far the most important.

I work for a company that was founded and is fully owned by one
woman, who built the company up from scratch. One of the many things I have
learned working for her is to look at everything I do from her perspective. When
I make an IT purchase, that money is coming, quite literally, out of her pocket.
I have to ask myself: Does this purchase make sense? Is it the best use of the
company’s money? If it were my money, would I agree that this
purchase is more important than buying myself an Xbox One or a new car?

I’ve worked for large, publicly traded companies, as well. But
nothing quite hammers home the value of a dollar like asking a specific person
to open her wallet and hand you that dollar.

For every line item that passes the test above, I make sure
that an English (i.e., non-techie) description of each item is included. My
boss may not want to get into that level of detail. But if she does, I want to
make sure that she can understand where every one of her dollars is going.

Similarly, whenever possible, I try to include some
explanation of the ROI/value of the purchase. This is a mandatory, formal
exercise for larger new initiatives. But even for smaller purchases — and
recurring expenses — I try to provide an explanation of “why.” This
assists with the prioritization (which is included later).

Build a foundation for all-year budgeting

I follow a number of practices throughout the year (some
obvious, some less so) that help me better manage the costs of my department
and make formalizing the next year’s budget a relatively painless process. Really,
I am laying the groundwork for my budget all year long. Here are some
suggestions.

Track what you spend
as you go.
Let’s start with an easy one. Whenever you make a purchase, track
it against a budget line item. Maybe you have a system for this or maybe you
just do it on a spreadsheet. Save yourself a hassle and don’t end up in a
situation where you spend a weekend digging through a year’s worth of emails to
figure out what your costs were for the prior year. And avoid “catch-all”
buckets as much as possible.

Recognize when you
make unplanned purchases.
Acknowledge when you are required to make an
unplanned purchase and document it on your running budget. When it comes time to
start working on next year’s budget, you will be way ahead of the game. You’ll
have last year’s budget and all expenditures for the year, and you can see how
closely those expenditures matched up. This gives you the information you need
to do a better job of forecasting your costs and justifying those forecasts.

I’ve also been in plenty of situations where the CEO or CFO has
come to me and asked for some “quick guidance” on next year’s costs
long before the budget is due. By tracking as you go, you are in a position to
come up with a quick number you can live with.

Track recurring costs.
IT departments have all sorts of recurring costs. And they don’t recur at the
same intervals. In my department we have annual software assurance costs, biannual
equipment support costs, and thrice-annual vendor contracts for things like
copiers. Each vendor has a different contract duration and each contract has a
different renewal date. We track all of these contracts closely.

A great way to do this is in a tool like SharePoint. You can
create a custom list that tracks all the key information about a contract:

  • Vendor
  • Contact information
  • Service description and level
  • Asset tag (for asset-specific
    contracts like equipment support)
  • Renewal dat
  • Duration
  • Cost
  • Payment terms (yearly payment,
    quarterly, etc.)
  • Even a scan of the signed contract

SharePoint is a great solution for this, but there are lots
of options. We built a custom tracking form in our CRM system.

Track contract end dates
and payment dates.
This has been the key data element for us. By knowing
when payment is due on each contract, we can see, at a glance, all our
recurring costs for the next month, quarter, or year. When we first began this
initiative, it took some time investment to get all the contracts loaded (and
discovered). Now though, it is part of our contracting process and has become
second nature. I am always just a couple of clicks away from the list of next
quarter’s, next year’s, and the following year’s costs for all our existing
contracts.

Track lead time for
vendor assessments.
We track one additional field for each contract, which we
term the “horizon line.” This is the number of days prior to the
contract end date when we will want to consider vendor alternatives. Each
contract is tagged with a horizon line of 30 days, 60 days, 90 days, etc. We
have scheduled an automated report to be pushed out monthly that shows all
contracts with a renewal date “on the horizon.” This gives us time to
consider whether we want to renew the contract, evaluate alternatives, and
begin negotiations. This is especially useful on contracts that auto-renew,
such as SaaS contracts that lock us into long-term agreements and require written
notice 90 days (or more) prior to the contract end date to cancel without
penalty.

Track costs for new
hires by department.
Another budgetary item I keep up to date throughout the
year is the costs of a new hire. I’m usually asked for this information several
times over the course of the year. And when each department is working on its
annual budget, we’ve got the numbers to come up with the true cost of any
planned hiring.

The itemized costs include hardware, software, and other
licensing. I track this information by department: New sales people are issued
laptops and corporate cell phones; new customer service representatives are
given a PC and a soft phone. All users require a server CAL, an antivirus
license, Windows, Office, and the list goes on. Folks in finance require a
license to the accounting system. Developers require a license for the
development tools. The list for each is extensive. In some cases, the cost is a
true expenditure (like for a laptop). In some cases, the cost is really a small
portion of a larger purchase that can be allocated to a single user (like if
you purchase a 25-pack of user CALs). The goal is to document the incremental
cost of adding one more employee.

Keep these budget basics in mind

Okay, so all the above items are things that (ideally) you’ve
been doing all year. Now for a few points to consider when actually putting the
official budget together. If you are creating your budget from scratch, there
are plenty of templates out there you can use to get started. However, I
recommend that whatever you use, you consider the following things.

Categorize,
categorize, categorize.
My
budget template categorizes all line items in a number of ways:

  • I break down costs by whether they are new
    initiatives, recurring costs, or salary. If you’ve been following the “all-year
    budgeting” approach, the new initiative component of the budget will take
    most of the time.
  • I break down costs by various categories, such
    as desktop hardware, network hardware, software, printers/copiers, and telecom.
  • I track the type of cost: equipment, software
    license, support, etc.

The finance folks will probably have their own ideas of how
expenditures should be categorized. For instance, they may look to IT to assist
with decisions on whether purchases are depreciable assets.

Indicate priorities.
Ultimately, and unfortunately, the budget is finite. Planned purchases must be
prioritized so that decisions can be made about what those limited resources
are spent on.

Provide a calendar of
spending.
Included in my budget is a calendar of spending that provides
visibility into when purchases are expected to occur throughout the year. I
track each item by the quarter in which it falls. Some organizations want to
see this broken down by month; others are fine knowing which half of the year
it falls in.

Additional resources