Surviving the Budgeting Process, Part 1

“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
Item Capital Expense Capital Expense Capital Expense
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.

This entry was posted in Best Practices and tagged , , , by Dave Gordon. Bookmark the permalink.

About Dave Gordon

Dave Gordon is a project manager with over twenty five years of experience in implementing human capital management and payroll systems, including SaaS solutions like Workday and premises-based ERP solutions like PeopleSoft and ADP Enterprise. He has an MS in IT with a concentration in project management, and a BS in Business. He also holds the project management professional (PMP) designation, as well as professional designations in human resources (GPHR and SPHR) and in benefits administration (CEBS). In addition to his articles and blog posts, he curates a weekly roundup of articles on project management, and he has authored or contributed to several books on project management.

One thought on “Surviving the Budgeting Process, Part 1

  1. Pingback: Surviving the Budgeting Process, Part 2 « The Practicing IT Project Manager

Comments are closed.