“A goal is not always meant to be reached; it often serves simply as something to aim at.” – Bruce Lee
“In preparing for battle I have always found that plans are useless, but planning is indispensable.” – Dwight D. Eisenhower
The key to surviving the budgeting process is to recognize that a budget is simply a very well-researched, methodical guess. You aren’t trying to get it right “to the penny;” that’s the goal of accounting. You’re simply trying to identify all of the places where money has to be spent, where it will come from, estimate the cash flows, and determine how your organization will account for them. Because that’s the information, along with the ROI, that your decision-makers need in order to allocate funds for a project.
Every IT project of any significance will spend money on multiple activities and assets, usually spread over some period of time. So your first step should be to sketch out a zero-based timeline (don’t try to tie it to a specific calendar month), and place the points in time where the non-labor expenditures will occur. You probably don’t have to buy everything on the first day, and your Comptroller will almost certainly be grateful if you can spread out your spending. The drawing below depicts an eight-month project with a pilot phase, followed by a full production phase. In this case, the project will take a “just in time” approach to paying for software, hardware, and training.
Note that most hardware and software vendors will charge for the first year of support, so you’ll pay for them at the same time. You should also determine whether you’ll be charged for sales tax, shipping, or other fees. Typically, you’ll be charged sales tax at the rate in effect for the tax jurisdiction of the delivery address. You should also review your organization’s capital spending policies, so you can determine whether an item will be accounted for as a capital expenditure or an operating expense. Continuing with this example, we’ll estimate each cost element, one month at a time.
|Month 1||Month 5||Month 7|
|Training||$ 18,000||$ 11,500||$ 18,000|
|Software licenses||$ 35,000||$ 180,000|
|Sales tax (8.1%)||$ 2,835||$ 14,580|
|Software support||$ 7,700||$ 39,600|
|Hardware||$ 52,000||$ 120,000|
|Sales tax (8.1%)||$ 4,212||$ 9,720|
|Shipping||$ 120||$ 160|
|Hardware support||$ 10,400||$ 24,000|
|Totals||$ 94,167||$ 36,100||$ 11,500||$ 324,460||$ 81,600|
|Total non-labor Capital||$ 418,627||Total spend month 1||$ 130,267|
|Total non-labor Opex||$ 129,200||Total spend month 5||$ 11,500|
|Total spend month 7||$ 406,060|
|Total non-labor spend||$ 547,827|
As you can see, we now have a great deal of detail, organized both in terms of cash flow and in terms of accounting for the expenditure. It’s also clear where the “go / no-go” points are, in terms of when a failing project should be “killed” in order to avoid throwing good money after bad. Next week, we’ll add the labor and travel costs to our budget.