Guide to IT budgeting - Strategy, approach, importance and checklist
All business owners and IT executives would undoubtedly agree that IT budgeting can be an extremely painful and time-consuming process.
Right from the IT budget planning to the actual implementation.
Companies of all types struggle with this.
Now, the major reason for this difficulty can be the unawareness regarding the budgeting process which prevails among the IT team members, and the miscommunication between the finance and IT department.
Now, the IT budgeting process is a lot more than just filling numbers and data in an excel sheet.
IT budget management requires all the company heads and IT professionals to work together in defining the objectives of IT in the business and the expected outcomes.
Here is everything you need to know regarding the IT budgeting process, to make your work earlier and simpler.
To have a comprehensive IT budget, you need to have a strategic approach to the IT budgeting process.
Begin with identifying the objectives and setting the IT initiatives in regard to company growth.
After evaluating the IT initiatives, incorporate those in the budget to then look at the bigger picture.
IT budgeting and forecasting can very well seem like a huge chunk of tedious work, however here is an IT budget components distinction that may offer a useful insight into strategic IT budgeting:
There are the components that are essential and keep the operation going.
Run budget items can be server replacements, critical software updates, costs of maintaining and administering the IT infrastructure, etc.
These items are inevitable as they are the core of the daily functioning of the IT department in any business.
So, if an organization is planning on cutting some funds from the IT budget, run initiatives should not be compromised.
This is because cutting down on run IT budget items would go around and increase the operational risk, which is something no company wants.
A server, network, or application failure is the last thing you would want to face.
These budget items are ones that help the company upgrade its existing capabilities and also try some new technologies and strategies.
For example, new software implementation for boosted efficiency, more protective technology and a new firewall for security against cyber fraud, website improvements for better customer interaction, etc.
Growth items are not essentially centric to the basic functioning in comparison to run initiatives and hence have certain time flexibility.
This means that these can be used when the business has a good amount of cash flow and can be cut back as well when there isn’t much money to dispose of.
These items are research and development specific.
Transformation initiatives are taken to adopt new technologies to explore a new scope of possibilities, make some business development-centric changes in the root level of processes or introduce some new product feature or service.
For example, some product prototypes or some new business applications.
Moreover, when a business is short on finances transform initiatives are first on the list to be cut back, unless the item is extremely useful and connected to the strategic plan of the business operation.
Plus, when you categorize your IT initiatives like this, you can easily make adjustments to the timing of when which IT expense needs to be done in response to the changes in the cash flow of the organization.
Not having an IT budget means, that whenever an IT expense arises you have to justify it with proof, which is an extremely stressful and unnecessarily overhead task.
This need for justification can be easily terminated with the help of an IT budget.
Look at an IT budget as a project plan or roadmap which is used to give direction and also a holistic view of IT budgeting and forecasting along with the funding needs.
It gives you the facility to determine if the IT department is performing according to the budget allotted and if there are any resources that are unused in the department and where can those be put for better use.
You can also compare what you are spending on the IT department in comparison to other departments if you work according to a departmental budget plan.
Moreover, instead of just randomly putting money in the required areas and holding a list of expected funding, an IT budget for small businesses can help you prioritize the IT initiatives of your company and then prudentially allocate the funds in compliance with the strategic plan.
Along with this, an IT budget with IT expense categories allows you to quickly pick out areas where there is overspending, for example, if your spend on a huge software but ultimately realize that you are paying for some unrequired license and tools.
One of the best benefits of an IT budget is that every strategic initiative is already justified.
A budget is much more than just an administrative roadmap, it can help you support and validate all your IT strategies.
Related read - Guide to business budget - Types, importance and steps
Here is a breakdown of all the essential items of an IT budget:
Hardware is defined as the equipment and technologies which are used to run the operations.
This includes computers, screens, printers, network servers, etc.
Software is defined as all the programs and applications needed to run all the hardware.
Procuring software that is business-specific and other industry-centric programs comprises a major chunk of the commencing IT budget.
This includes operating systems, management and organizing software, documenting programs, etc.
More and more companies are shifting to the smarter way of business processing which is cloud-based software solutions.
Cloud services comprise everything from document storage to subscription-based business applications.
You are required to calculate and include the cost of the subscription services which are used by your IT department.
Many companies hire IT professionals to handle and look over the daily operations and to also solve all the IT issues.
However, a better solution would be to outsource IT management and operations to a third-party vendor.
This way your company would be able to cope with an IT failure without having to pay the full-time salaries of the IT staff members.
This includes staff for IT equipment operations, internal IT staff, maintenance, etc.
Overhead IT expenses are those which aren’t included in the direct IT expenses like hardware and software.
This consists of other costs like accident protection, insurance for costly equipment and devices, etc.
Repairs, energy consumption, and upkeep are also added to the overhead costs.
To always have a competitive edge, every business tends to keep upgrading their systems, because technology becomes obsolete quickly.
Software often needs to be updated for unlocking new features and tools.
Upgrading may also mean acquiring new equipment altogether or maybe just replacing floundering components with new effective ones.
An IT strategy should essentially consist of security as a factor.
Security breaches cause data and financial loss.
Many businesses don’t possess the knowledge of how exactly should the protection vulnerabilities be dealt with.
An IT budget must include cybersecurity measures and costs. This includes anti-virus software, firewall, network monitoring, etc.
You might actually be shocked how much can IT equipment and maintenance cost if you don’t plan it right. Here is a checklist to help you through the process:
1. Examine the previous year's spending and build the budget on that baseline: It is okay if you didn't actually follow a formal IT budget the previous year, you can still get insightful information from the previous year's data.
2. Apply the regular budgeting techniques: IT budgeting is not an alien thing, it is just like getting a budget for any other department.
3. Determine the scope of the budget: This means listing down what things are included in the budget. For example, will support staff costs be covered in the budget or in some other budget.
4. Ask for an expert’s opinion: You can also talk to other business owners because there may be things you might be missing. Some sort of consultation would be really helpful.
5. Calculate the hardware estimates: Make sure you have an idea about the currently used IT equipment and how much their maintenance would cost. Timely maintenance is important to keep operations smooth.
6. Software and application costs also need to be calculated: Determine an approximate amount of how much would it cost to keep the business software running. This includes cloud service fees and subscriptions cost.
7. Identify savings areas: During the IT budgeting process, try to pick out areas where you can save money from either automation or hardware replacement.
8. A custom-made system requires contingency funds: These are funds that are used during any mishappening, the occurrence of any unexpected event, or heavy procedures. For example backup testing.
9. Keep a separate fund for routine upgrades: Basic hardware or system would have a good lifespan but smarter devices or newer technology may have a shorter lifespan than expected and will need to upgrade every now and then. This can also happen because of technological advancements.
10. Factor in business growth: Keeping in mind the objective for the development of your business you may need to hire new people or adopt new technologies which means additional costs, which need to be factored into the budget beforehand.
11. Allocate funds for IT security: You will always need money for backups, security software, disaster recovery, etc.
12. IT training also needs to be considered: To increase productivity and efficiency you may also need to invest in IT training so that your employees can get used to the system.
13. Make it part of your business plan: Always remember the greater benefit and the bigger picture. This means that the IT budget needs to be in compliance with the business plan.
14. Routinely review your IT budget: Make it a quarterly or annual process to review and amend your IT budget according to the circumstances.
Whenever a business has a shortage of cash flow, the most common thing to do is to cut costs around the board, which means there is no regard for productivity.
For example, if you make a cut-off in the backup system, it may go from being backed up daily to weekly.
This means that there is a huge possibility that something may get deleted or lost and may not be recovered.
Ultimately, this affects the business in the long term.
When you adopt any new technology, it becomes imperative to invest in the support and training of your employees.
This is necessary so that they know how to use the technology in a proper and secure manner.
Naturally, if you don’t invest in this, your employees would be unaware of the use case which would eventually lead to expensive mistakes.
Even after the numerous warnings and reminders that are given by the system, businesses choose to ignore them and move forward with the same system.
However, it is widely known and evident that outdated systems become all the more vulnerable to malware attacks and viruses, which in turn can cause huge data and money loss.
This may not seem like a huge problem or a problem at all, however, it is one of the most common mistakes in the IT budget of many companies.
Tracking all your technical components forms is a crucial process which extremely time and effort-intensive.
Although, keeping track of all the IT items is the only way to ensure that everything is used properly and for the best of the company.
This is seen often that when companies try to make cutbacks, they find it fit to degrade the standard and level of hardware or software.
You may think that not choosing the premium services will save you money, however, be sure of what you are giving up.
The most imperative knowledge to stay on of the game is to know who are your competitors and how are they using technology.
Along with this, you should also know how can you make IT your weapon to win against other businesses and establish yourself as a popular company, which in turn of course means more profit.
Top e-commerce companies have started providing super-convenient and personalized experiences to the customer which significantly raises their expectations and raised their demands.
This means that more and more customer satisfaction-driven technology needs to be used to ace over other companies.
You must have a clear understanding of the customer's expectations and how can those be fulfilled even before they raise any concerns with the help of technology.
Technology has proven to be a powerful tool to increase revenue, reduce risks and altogether diminish the overall costs.
By integrating the business growth objectives and strategies in the IT budget, your business can easily seize opportunities and basically hack the development algorithm.
IT can bring significant improvements in a business’s agility and streamline all operations.
The dexterity of your business can be improved further by changing your IT landscape, enhancing the data quality, and building flexibility.
It is quite possible that you have the best system, but aren’t using it effectively.
Technology singularly does not bring in value. To create high-quality value, it needs to be combined with the use practice and strategy.
The use-practice is appropriate skills and knowledge of the processing.
Your IT budget must have a place where all the risks and threats are assessed properly and solutions for those are incorporated.
This will prove to be immensely helpful in mitigating and preventing the company from security breaches.
Having a timeline of everything, when what is supposed to be done is an essential aspect of IT budgeting and forecasting.
This will make meeting deadlines easier and the finances will be sorted.
Going back and reviewing the former budgets can give a useful idea and understanding of what all needs to be considered and accounted for.
As everything needs to make sense logically and has to be justified, this can be a way to know all the included items.
IT budget planning includes a step where you need to ensure that the IT budget reflects the overall strategy and identifies with the bigger picture of the growth of the company.
This gives you a better insight as to where can you save money and where is more investment needed.
Every IT budget has three IT expense categories: capital, project, and operating.
Capital expenses include software licenses, replacements, hardware purchases, etc.
The project budget consists of expenses that are incentive-specific.
Operating expenses include maintenance costs, subscriptions, etc. Properly categorizing IT expenses and tracking them is an imperative process.
Preparing an IT budget is not something you can just randomly put together in a day.
It takes time and proper analysis and judgment to create an effective budget.
You need together input from your management team, finance team, and above all the IT team, to make the right decision.
Also, you cannot just create an IT budget and just throw it away. Be careful to follow it and complete all the checkpoints, to grow rapidly.
IT budget is supposed to be an estimate of all the money that will be invested and coming in.
Practically it cannot strictly abide by the ledgers, which means not every penny can be budgeted.
This is because you are preparing only an approximate IT expense and revenue, and many a time projection can be wrong.
So, make sure that your budget is flexible enough to change according to the present demand and situation.
To make the IT budgeting process simpler, you can assign different budget management roles, which would also ensure an effective checks and balances system.
The types of budget management roles are- Budget planners, managers, contributors, and coordinators.
IT budgeting best practices include determining objectives according to short-term and long-term.
This means that you should have deep knowledge of the roles, responsibilities, and results expected from the IT department.
These objectives go way beyond just minimizing the bottom-line.
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