In writing this article, IT Budgeting Best Practices, I would like to say that during my professional career in the IT area, I have had the opportunity to work as an IT Manager, as well as an Information Technology Infrastructure Manager, and as a Consultant, in different companies, from startups to multinationals, in Mexico and the US.
And now, I will share my experience in IT Management, specifically regarding IT budgeting best practices and how to create an excellent IT budget.
I hope that you find this article will be helpful as a reference so that you can also work on your own Information Technology budget, for which I will try to share all the tips and best practices that I have acquired in my career of more than 30 years as an IT professional.
IT Budgeting Best Practices
The goal of having an Information Technology budget is quite simple. All organizations must be able to plan their expenses and income to ensure an adequate cash flow that allows them to operate the business in the best possible way.
For this reason, all departments of an organization, including the Information Technology area, must annually prepare their budget; in the case of the IT department, it must consider all technology investments and expenses.
IT Budgeting Best Practices
One of the IT budgeting best practices, the IT budget should be prepared, discussed, analyzed, and fine-tuned during the second semester of the year, with the idea of presenting it to the General Director or Finance Director for approval, at the end of the year or the beginning of the following year, as an example, during December or January.
Another critical point is that the budget must be prepared in such a way that it includes the months in which it is planned to spend each one of the items or projects.
In other words, monthly planning must be carried out item by item in such a way that it allows us to identify what expenses and investments will be made each month.
IT Budgeting Best Practices
Another IT Budgeting best practice is that all the expenses and investments you want to spend in the following 12 months must be included in that budget. Otherwise, they cannot be paid.
Usually, the IT budget must be prepared little by little, in advance, over several months, being as detailed as possible, so that it can be presented to the CEO or CFO for approval at the right time.
The way the IT budget should be prepared should be, including every one of the projects, expenses, and investments that are intended to be carried out in the following financial year.
For example, the number of computers, printers, network devices, Internet data link expenses, software, and any other fee or investment in technology intended to be acquired in the following year should be included.
This list should be as extensive and detailed as possible and classified according to the General Ledger accounts to which each expense belongs.
Now, it is essential to say here that you must have the quotes in advance for each of the equipment, tools, accessories, software, etc., you wish to purchase.
In addition, as a recommendation, it is always a good idea to set the prices a little above the quoted price in the budget since we must remember that we are working on a budget for the next 12 months, so prices and conditions can change and this way we can be a little bit more protected against these changes.
Before preparing the IT budget, it is essential to have an updated inventory of computers, printers, switches, routers, firewalls, access points, software, and all hardware and software.
In the same way, the dates on which said the equipment was purchased must be included to make better planning for the replacement of equipment; for example, the most common plan is that a computer is replaced after 4 or 5 years of operation, depending on whether it is a Windows PC or Mac.
In the same way, the IT Manager must meet periodically with the Directors or Managers of other departments to know first-hand what each project is to include as part of the Information Technology budget for the next 12-month period.
IT Budgeting Best Practices
One of the most critical points on which the IT budget must be created is, no doubt, the definition of what the General Ledger accounts belong to IT.
What I mean is that it must be clear that all expenses and investments made by the Information Technology department must be recorded and must be identified to the General Ledger Accounts, which clearly will be IT’s responsibility.
For example, it must be evident to which accounting accounts the Internet expenses, computers, printers, etc., will be registered.
IT Budgeting Best Practices
The Information Technology budget must be separated into Capital Investments (CAPEX) or Fixed Assets and Operating Expenses (OPEX).
IT Budgeting Best Practices
Capital Investments (CAPEX) or IT Fixed Assets
Within the IT Capital Investments (CAPEX), all fixed assets will be included, and they must be carefully reviewed by the current tax regulations of every country to verify which investments should be considered in this category.
In each country, the tax legislation is different, and there is a maximum limit on the cost of the item to be purchased so that it can be considered an operating expense, so it is essential to consider the above.
If an expense can be deducted in the same year in which it was purchased, it is considered part of the OPEX; however, if it cannot be removed in the same year and, hence, must be tax depreciated over a more extended period of several years, then it must be considered as part of the CAPEX.
The Balance Sheet Statement will classify Investments as CAPEX as Fixed Assets accounts.
IT Operating Expenses
On the other hand, expenses that can be fiscally depreciated in the same fiscal period in which they were acquired will be considered part of the Information Technology operating expenses budget.
For example, in the US, computers can be considered an Operating Expense and be deducted 100% during the same period.
Internet service expenses, software subscription expenses, such as MS Office, ERP, or CRM, and those acquisitions of technological accessories, among many others, can be classified in this classification.
It is essential to point out that it is most convenient for all companies always to deduct expenses immediately; therefore, if possible, they should be considered as Operating Expenses (OPEX), so they can be classified in the Profit & Loss Statement.
For this reason, there must be excellent communication between the Accounting or Finance department and the Information Technology area to correctly classify what should be considered fixed assets and operating expenses.
IT Budgeting Best Practices
Next, here is a list that is not intended to be extensive but intended to serve as an example of what can be considered capital investments (CAPEX) or fixed assets investments in Information Technology.
Acquisition of Computer Equipment, Servers, and Printers
As part of an organization’s plan to replace all servers, desktop, and laptop computers, printers, etc., that may be reaching the end of their life cycle; they must be included in the annual IT budget.
Investments in voice and data network infrastructure
Here we can include network equipment such as switches, firewalls, access points, routers, radios, towers, and antennas, and in general, any other investment that, according to the planning of new projects or due to obsolescence, should be replaced by new equipment.
However, all investments to provide new voice and data cabling for a new building or office to be built or adapted can also be included here, including network cabinets, cabling, connectors, and labor.
Investments in Fixed and Cellular Telephony
Speaking of investments in telephony, here you can include the purchase of new telephone switches, and IP voice servers, which, according to planning, must be purchased for the organization.
It is essential to say that investments in equipment must be separated from all telephony expenses, like phone call expenses, which generally should not be assigned to the IT budget.
IT Capital Expenditures / Fixed Assets (CAPEX)
IT Budgeting Best Practices
Below we will go into more detail on what can be considered an Information Technology Operating Expense.
Once again, it is essential to double-check with the accounting or fiscal area, which can be considered expenses and which should be considered Information Technology investments.
It is common for IT operating expenses to be periodically on a monthly, bimonthly, quarterly, semi-annual, or annual basis, so it is essential to verify the frequency of these expenses.
For example, expenses for voice and data links usually are paid monthly rent; for example, software licenses can be monthly, quarterly, or annual.
Voice and data links expenses
Here we can include everything the company pays for data link services, Internet links, private links, cellular links, etc., and in general, any other service that allows communication to the Internet and transmits voice or data.
This usually includes services from companies such as AT&T, Comcast, and T-Mobile, to name a few providers in the US.
Landline and cell phone expenses- telephone licenses, maintenance, and purchase of telephone and cell phones
Regarding landline and cell phone expenses, maintenance expenses for the telephone system should be included here, including the purchase of new telephone devices, as well as software licenses that may be required to grow or continue operating the telephone system of the company, as well as the cost of the cell phones that the company owns.
We must be cautious not to include the expenses of a company’s telephone calls here since they do not correspond to the IT area.
Software expenses – licensing, subscriptions, software maintenance contracts
The software requires paying licensing or monthly rent for which all software licenses must be included, and in general, all software expenses incurred by the company, such as Microsoft Windows, MS Office, Google Workspace, and all those applications that were not developed by the company, such as ERP, CRM, or sales, production, warehouse applications, etc.
This is one of the most critical points in the Information budget, and the list must be rigorous so as not to omit software. It is essential to have an updated software inventory that allows us to have greater control of the Information Technologies budget. Information.
IT Human Resources Expenses – IT staff salaries, training, and coaching expenses
IT staff salaries and wages are undoubtedly one of the most critical aspects that must be considered as part of the Information Technology budget.
Typically wages and salaries are one of the expenses that organizations care the most about, and when expenses have to be cut, HR expenses are among the first to review.
Printing costs
Printing costs must also constantly be carefully monitored by the Manager or Director of Information Technologies, and here in this category should include printer maintenance, toner, and ink cartridge costs, among others.
Technology Accessories
All minor Information Technology purchases must also be included here, which in many cases represent a significant expense but must be constantly monitored by the IT Director or IT Manager every month.
For example, accessories such as USB sticks, network cables, tablets, monitors, webcams, etc, should be included here.
External Consulting and Maintenance Expenses
Another important point that should not be left aside is all the costs of external consultancy and maintenance that the company has for hardware and software, and must be included as part of the Information Technology budget.
For example, hiring a consultant to review the Information Security area may be necessary, or implementing any project, such as a data backup service or cloud computing, to mention a few.
IT Operating Expenses (OPEX)
IT Budgeting Best Practices
As we have already seen, preparing the Information Technology budget is a complicated process that must be frequently supervised and updated often.
It is essential to strictly control what was spent against what was budgeted, item by item and month by month, to avoid exceeding the authorized budget.
Sometimes, it may be convenient not to spend on items that are not going to be needed, but that budget can be used for other more critical projects of greater need for the company or an emergency.
IT Budgeting Best Practices
Once it has been prepared, the IT budget must be submitted for approval to the General Management of the company or by the CFO.
Now that the budget has been authorized for a whole year, it does not mean that the IT area can spend it automatically.
On the contrary, good practices and a good recommendation is that each month it must be submitted again for authorization to the CEO or CFO, so every month’s budget must be approved before spending it.
As we have seen, the Information Technology budget must be carefully prepared and monitored by the Information Technology Director or Manager.
The objective is to constantly measure what is spent versus what is authorized, in such a way that there is discipline in spending and to avoid exceeding what is authorized by the Management.
Managing a good IT budget requires a lot of planning and control on the part of the Information Technology Director or Manager.
It is very important that any project, any expense or any investment has previously been considered as part of the IT Budget, since otherwise, having to spend something that is not budgeted, creates additional financial stress for the company and forces us to obtain resources that I had not considered.
