How do IT leaders forecast and budget for the IT team?
You probably did not get into technology to forecast and manage budgets. But understanding how your department spends money is important to your success as an IT manager. After all, you are responsible for setting and achieving your team's strategic plans — it requires resources to do so. You need a solid understanding of what you want to achieve and the budget it will take to get there — from ongoing expenses (e.g. software subscriptions, hardware fees, and operating costs) to fixed budgets for particular projects or initiatives. You may also be involved in setting goals and budgets for headcount and hiring plans.
Knowing the investments it will take in order to reach your goals makes it easier to negotiate a budget with company executives. This is especially true when you need to get budget approvals from company leaders who still view IT as a cost center. If you are able to explain the impact that your initiatives will have, you can make a stronger argument for the resources you need.
What is the difference between forecasting and budgeting?
Forecasting and budgeting are similar exercises that help you capture and evaluate your department's financial needs. But there are some important distinctions:
Forecasting is the process of estimating what you will need in the future. It requires comparing your current expenses to future plans in order to project the resources you will need.
Budgeting is the annual, biannual, or quarterly process of drafting a spending plan for how the IT department will use the resources you are allocated.
Forecasting helps you predict how accurate your current budget is — whether you will spend more or less than you planned for each area of investment. Its aim is to identify and analyze patterns in order to improve your ability to set budgets in the future.
Budgeting helps you determine how you will accomplish your goals with the tools and resources you have. It forces you to make prioritization decisions about where to invest based on what has been allocated to you.
Forecasting typically occurs for a specific period of time (e.g., forecasting the funds you will need for the year ahead). However, you will also continually forecast the costs of new initiatives or tools as you receive requests from other teams. This information informs ongoing forecasting.
Budgeting is a discrete task aligned with company planning periods — typically done annually, biannually, or quarterly. Of course, you should review your budget periodically and adjust as needed.
Why are forecasting and budgeting important?
Although the IT team may not directly drive revenue or interact with external customers, your work is essential to improving how the organization as a whole functions. Proper forecasting and budgeting enable you to acquire company resources and use them more efficiently — so you can focus on the work of maintaining and optimizing technology.
But there are many other benefits to creating accurate forecasts and budgets. One is accountability. A budget is a commitment — you can only spend the dollars you have for a given project. Staying within that budget requires smart planning and the efficient use of resources. You need to distill the IT goals into their most fundamental units of work, so the team asks for and invests only in the projects that will help you achieve your objectives.
The act of building and forecasting budgets also requires transparency. You are providing visibility into your department's areas of focus and how each contributes to broader company goals. For example, if you want to update your architecture or technology stack, you have to be able to articulate the "why" behind these initiatives — what makes them worth pursuing and how they directly contribute to company goals.
Accurate forecasting is especially useful for planning purposes. Having a firm grasp of how your ongoing expenses may change in the next quarter or year helps to mitigate risk and reduce surprises. For instance, if your organization is in the early stages of implementing a data transformation, you can anticipate the additional expenditures required and temporarily reallocate your budget.
How can I create a budget for my IT team?
You want to be able to explain to the rest of the organization how IT initiatives and investments help you reach company goals — for example, increasing revenue, boosting productivity, reducing costs, or improving security. This requires that you are able to measure IT's impact and accurately secure the budget that you need to support your success.
Here are a few tips for effective IT budgeting:
1. Start with measurable goals
Clearly align each IT objective to a corresponding business goal. For example, let's say you have a company goal to lower operational costs by 20 percent in the next six months. It would make sense to set a corresponding IT goal of reducing costs as well.
This might mean identifying new automation tools to invest in. You have to show how the time and resources required to vet new tools, roll out new processes, and train the team on a new way of working will save time and money in the long run.
Whether you are focused on maintaining existing systems or implementing new technology, you need to be able to link the time and money spent back to its impact on business goals. The more you are able to show impact using objective KPIs, the better.
2. Get an accurate view of historical costs
Look closely at prior IT budgets, noting any adjustments that were made throughout the year and why. This is especially important if your company is undergoing an enterprise transformation — you need to be aware of what it takes to keep the lights on before you can propose new areas to invest in.
You should also maintain an inventory of all IT assets, including hardware, software, and services. It is important to monitor the lifecycle of hardware and software — keeping track of purchase dates, current condition, and when they will become obsolete.
3. Balance old and new
Your IT budget needs to balance current needs as well as areas of future investment. The ability to innovate depends in part on whether you can push for new tools and technology that will help move the organization forward.
There is no perfect ratio for old versus new investments. The balance will depend on many factors — including company revenue, IT leadership, and how often the team is encouraged to take risks.
4. Find opportunities for savings
Identify opportunities in the budget where you can continue to deliver value and save money. For example, many companies have shifted workloads to the cloud for a service-based model of working — where you only pay for what you use. This is a change that requires upfront time and effort from the IT team but ultimately supports future growth and cost-savings.
5. Anticipate questions from business decision-makers
The value you provide to the business can be misunderstood. It is hard to quantify your impact — explaining the risks of a poor cyber management platform, for instance, or estimating the impact of a data breach.
Prepare in advance for tough questions from company leaders. They will want to understand the big-picture impact of what you are proposing. For example, if you are advocating for a new security or monitoring tool, be ready to talk about its benefits. Executives may not care about specific features, but will care about the broader business implications or impact to the team.
Ensure that your IT efforts are aligned with business goals and success metrics. In this way, you can continue to put goals first and make informed decisions about the budget.
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