In today’s world, we all need technology to run a business, whether it’s a small non-profit business or a large manufacturing company. Since businesses rely on digital solutions to improve productivity, optimise operations, and remain competitive, thus, IT budgeting has emerged as a critical component of financial planning. A well-structured IT budgeting helps to contribute to an organisation’s growth to the next level.
In this blog, we will explore an essential guide to IT budgeting with the best practices and tools for success.
What is IT budgeting?
IT budgeting is the process of allocating money for IT services and infrastructure of an organisation. It entails developing a financial plan outlining how the business will spend its finances on IT-related projects, operations, hardware, software, staff, and other expenses over a certain period, usually a fiscal year. IT budgets are often determined by the size, nature, and needs of your organisation or sector. Thus, IT budgeting is essential for supporting business objectives and promoting innovation and growth while controlling expenditures.
Key components of an IT budgeting
A wide range of expenses, such as hardware, software, staff, services, and other technology-related costs, are included in an IT budget. The typical components of an IT budget are outlined below in three categories:
Personnel costs
It includes paying salary, incentives and perks, benefits, and training or upskilling costs for IT staff.
IT infrastructure expenses
- Hardware expenses are the expenses associated with purchasing, maintaining, and upgrading computer systems, network equipment such as servers and routers, storage devices, and other IT infrastructure.
- Software expenses include the cost of acquiring software licenses and support contracts, maintenance of software applications and operating systems, productivity tools such as CRM software, security software such as AV/AM, and other software solutions used by the organisation.
- Services: Expenses related to outsourcing IT services, managed services, cloud service, data server hosting, implementation of services like Microsoft Office 365 and other IT support and maintenance services.
- Subscriptions: Subscriptions for many applications such as Zoom, and Calendly.
Expenditures
- Capital expenditures (CapEx) are large investments made by an organisation in purchasing, maintaining or improving its fixed assets to use them over the long term.
- Operational expenditures (OpEx) are expenses spent on an ongoing or day-to-day basis by an organisation to run its business smoothly.
- Project expenditures: The cost and charges to run specific IT projects and enterprises, such as system upgrades, projects on software development, data analytics initiatives, and efforts on digital transformation.
Contingency and miscellaneous
A portion of the budget is put aside for unexpected expenses or IT-related emergency problems.
Why is IT budgeting important?
The IT budgets have several important purposes. They are as follows:
Cost management
A well-designed budget enables the allocation of resources, giving teams a rough understanding of how much money they spend. Nonetheless, it controls expenses by requiring teams to prioritise projects and activities. For example, if your IT staff understands you have a server that is almost ready for replacement but also needs to fix your website and patch vulnerabilities, having a finite quantity of spendable resources limits when those tasks may be completed. This, in turn, promotes innovation and cost efficiency, as team members try to fulfil goals while saving resources.
Decision-making
IT budgets are critical for strategic planning and decision-making. For an organisation to survive, planning must take into account the resources available to fulfil certain strategic goals in both the short and long term. To make the best decisions that are aligned with business and goals, IT departments require a strategic plan that describes the organisation’s ultimate goals as well as the staff and funding needed to achieve them.
Risk management
IT budgeting plays an important part in risk management and contingency planning. All organisations are prone to cyberattacks and natural disasters. Knowing the money and resources available to the organisation can assist IT teams in creating safe backups and determining the best technique for patches, data visibility, and monitoring access.
Communication between teams
An IT budget ensures greater transparency, and everyone has the same expectations regarding project planning and change management.
Better outcomes
IT budgets allow organisations to review the financial performance of their IT departments. This allows organisations to assess the value of IT by comparing actual expenses to budgeted levels.
How to create an IT budget?
There are several ways to create your budget for the IT department. They are listed below:
Be aware of the budget calendar
Knowing when things are due is an important part of budget planning. Understanding the process can help you fulfil deadlines and budget for all essential expenses.
Review previous budgets
Reviewing your budgets can help you understand what was budgeted for in previous years. Thus, amounts of budget need to be justified so that everything is strategic and rational.
Plan strategically
The budget should reflect both the department’s aims and its overall strategy. Thus, establish the top few priorities for the coming year. This will assist you in deciding where to save money and where to prioritise major expenditures. A reference to an IT service catalogue could be beneficial.
Properly address spending
All IT budgets should include information on three types of IT spending: capital, operations, and projects. Capital expenses include hardware purchases, software licenses or updates, and part replacements. Operational expenditures include subscriptions, maintenance, and hardware and software support. The project budget is meant to cover incentives-specific expenses. It is the most adaptable element of the budget and can be adjusted based on the rest of the budget and unexpected events.
Identify types and categories.
IT budgets are frequently consolidated into a single entity. However, identifying types and categories within the budget can enhance decision-making and overall planning.
What are the benefits of IT budgeting?
A good IT budget is critical for every organisation to preserve financial stability, optimise resource utilisation, and create a road map for monitoring investments. It enables them to predict future needs and respond fast when necessary. It also helps organisations make intelligent judgements about technology investments by identifying areas where money may be saved so that they get the most out of these purchases.
What are the things to avoid in IT budgeting and forecasting?
The most common IT budgeting mistakes are listed below:
Budgeting without research
Many people build their IT budgets on assumptions and guesses. When using guess figures, you can easily underestimate or overestimate the amount you put away for a need. One of information technology’s most common budgeting mistakes is purchasing unnecessary hardware or software. A corporation may overspend on hardware that cannot satisfy its operational needs, or it may overspend and fail to give staff the tools they require to do their duties.
Greater long-term cost
When a company is short on cash, the most frequent thing to do is cut costs across the board, which implies no concern for productivity. For example, if you turn off the backup system, it may switch from daily to weekly backups. This signifies that there is a high risk that anything will be deleted, lost, or cannot be recovered. In the end, this has a long-term impact on the business.
Holding off upgrades and replacements of hardware and software
Even after receiving several warnings and cautions from the system, businesses opt to disregard them and continue using the same system. However, it is commonly recognised and clear that outdated systems are more prone to malware attacks and viruses, resulting in significant data and financial loss.
Not considering the support and training
When implementing new technology, it is critical to get involved in employee support and training. This is vital to ensure that employees understand how to use the new technology or equipment correctly and safely. If you do not invest in this, your employees will be unaware of how to use technology, resulting in costly mistakes.
Adopting cheap level services and not comparing the differences
When organisations aim to minimise costs, they typically choose to lower the standard and level of hardware or software. You may believe that not using the premium services will save you money. But be certain about what you’re giving up.
No budgeting review or update
As long as you succeed, it’s easy to forget to monitor your budget. On the other hand, if you don’t take the time to re-evaluate your budget, you won’t realise how much money you’re wasting. There are many reasons why you should regularly evaluate and change your budget, including:
- A move to a new environment or area.
- A promotion or any other kind of increase in income
- Economic changes, including inflation
- Fluctuations in profits
Thus, to reach your goals, assess and modify your organisational budget to align your spending with your existing financial status.
Not having a plan for disaster recovery
Disaster planning involves ensuring that your backup systems are up-to-date, critical systems are accessible, and workers are aware of their roles during an emergency. A cyberattack is one type of disaster that requires the implementation of a backup plan. Another type of business continuity strategy is a disaster recovery plan (DRP). Your DRP should specify the best procedures your company will take to continue operations in the event of a disaster.
Neglecting cybersecurity
Due to the current increase in cyberattacks, it is critical to prioritise cybersecurity while developing an IT budget. IT departments are expected to generate more with fewer resources. This is especially true in the field of cybersecurity, where finances are tighter than ever. However, cybersecurity is more than just an IT expenditure; it is a strategic investment with severe advantages.
What are the IT budgeting tips and best practices?
The IT budgeting best practices are as follows:
Build and maintain a level of flexibility in the budget
To respond quickly and effectively to changes in the business environment, businesses must guarantee that their IT budget is flexible. It can be accomplished by regularly monitoring spending, setting aside reserve money for unexpected, recurring needs, and allocating necessary resources.
Prioritise IT projects and initiatives
When allocating funds for IT initiatives, it is best to categorise them based on their potential impact on the organisation’s mission, ROI, and strategic importance. As a result, prioritise projects that add the most value while also aligning with your short-term and long-term goals.
Emphasise IT alignment with your business goal
Your budget strategies should directly impact the organisation’s growth, competitiveness, and operational efficiencies. As a result, you’ll be able to explain why a certain expense is worthwhile.
Leverage benchmarking and industry standards
When preparing an IT budget, you can use benchmarking and industry standards to compare IT expenses to those of similar organisations. This will help you identify cost-saving opportunities.
Anticipate emerging technologies and trends
It may be required to devote resources to researching new prospects to stay ahead of the competition.
Review and adjust your previous budget
Regularly reviewing the IT budget ensures that it remains relevant and effective. Adjustments can be made as needed to reflect changes in corporate priorities or market conditions.
What are the tools for effective IT budget management?
The tools for effective IT budgeting are as follows:
Financial management software
It comprises budgeting tools that enable businesses to develop, track, and manage IT budgets when combined with other financial processes. Financial management software such as Intuit and Xero are excellent choices.
IT budgeting software
The IT department needs to be sophisticated budgeting software. These solutions frequently include pre-built templates, forecasting functionality, scenario planning, and connectivity with other financial systems. For example, Workday Adaptation Planning and Planful.
Conclusion
A well-defined IT budgeting process can serve as a roadmap for your approach. IT budgets are designed to acquire cash from C-level executives and assist you in identifying and implementing critical IT initiatives for your organisation. If you are like most IT leaders who want to cut IT operational costs and accomplish more with less, you should develop and adopt a smart budgeting strategy for your business.
