5.2  Budgeting

5.2.1 Introduction
5.2.2 Estimating the cost of budget items
5.2.3 Estimating the cost of workload dependent budget items

5.2.1  Introduction

Budgeting is the Process of ensuring that the correct finance is available for the provision of IT Services and that during the budget period they are not over-spent. The Budgeting process has a key influence on strategic and tactical plans. It is also the means of delegating control and monitoring performance against predefined targets. It is paramount that budgets are effectively integrated within the organisation and that managerial responsibility and accountability is matched and communicated in an efficient way.

As all spend affects profitability, it must be recognised that decisions about investment in IT Services and the integrated management IT Accounting discipline can help provide the competitive edge necessary for survival of an organisation.

All organisations have a periodic (e.g. annual) round of negotiations between the business departments and the IT organisation covering expenditure plans and agreed investment programmes which ultimately sets the budget for IT. These are closely linked to reviews with the businesses (individually or collectively) that cover:

• current projects and Service levels
• a review of the last 12 months
• plans for the next 1 - 3 years.

The final budget agreed for an IT organisation may include financial disciplines imposed by the organisation, including:

• limits on capital expenditure (see the definition in Paragraph 5.3.4)
• limits on operational expenditure (see the definition in Paragraph 5.3.4)
• limits on variance at any point in time, between actual and predicted spend
• guidelines on how the budget must be used
• an agreed workload and set of services to be delivered
• limits on expenditure outside the organisation or group of organisations
• agreements on how to cope with exceptions.

Further, the business departments which provide the revenue to the organisation, from which departmental budgets are drawn, may themselves have rigid limits on the way in which they pay for services - they may not be able to fund a Change in service or service level mid-year despite IT being able to provide it.

An example, very simplified, budget is shown in Table 5.1.

Table 5.1 - Example budget calculation

Note: the annualised cost is taken as 1/3 of the purchase cost, plus the annual maintenance cost and will be used in the Cost Model in Paragraph 5.3.3

5.2.2  Estimating the cost of budget items

The categorisations in Table 5.1, of hardware, software etc, are arbitrary but help ensure that all of the budget items can be identified. Other categorisations can be chosen: the test is that all budget items are identified. The categorisation needs to be consistent for two reasons. The first reason is to enable an organisation to make true comparisons, year on year, both with its own expenditure trends and with the costs of other organisations. The second reason is to provide a simple basis for activity based Costing, as expenditure items likely to be treated in the same manner logically, are grouped together. This may also be important if different accounting rules, e.g. Depreciation (see Paragraph 5.3.5), are to be applied to different categories of costs. Cost Types in Paragraph 5.3.4 provides more detail to these categorisations.

The cost of some budget items may not be known at the time a budget is drawn up, e.g. overtime payments, contractor payments, consumables, external network charges. These have to be estimated, usually based upon a previous IT Accounting period, or on a forward prediction of the costs of the estimated workload.

Some costs may vary from the estimates, depending upon the usage. An example of this is software licences that may increase (in steps) as further Users are introduced. Other costs may need to be estimated to cover out-of-hours support, major equipment re-location.

IT Finance Management must be cautious in estimating changes in costs where they do not fully control them. For example, planning a reduction of 20% computer accommodation usage by removing old disk drives and closing one room is unlikely to result in 20% saving in costs, as the rental for the space may be fixed by the lease.

5.2.3  Estimating the cost of workload dependent budget items

Another reason for costs changing, is when the IT workload Changes. For this reason, workload estimates and forecasts should be considered when drawing up budgets. Such estimates and forecasts are also required for the preparation of Service Level Agreements and for Capacity Management.

Estimates of workload volumes are normally obtained from historical data, and forecasts are made on the basis of updated information and revised plans. A fuller approach to workload estimating can be seen in Chapter 6.

In the simplified example, Table 5.2, a calculation is performed for the cost (for budgetary purposes) of the Wide Area Network (WAN).

Table 5.2 - Estimating workload-dependent budget items