Technology Planning: Non-Profit IT Budgeting
It's that time of year when many of our clients are finalizing budgets for the next academic year. For those readers who are not involved in the budgeting process (and even if you are), here is some information on how it typically works.
- In January or February, senior management or the CFO notifies department heads of the upcoming budget planning process and a tentative schedule.
- Management begins developing budgets based on current year expenses, forecasted revenues (rising or falling revenues like student enrollment or fundraising dollars), and key strategic initiatives or projects.
- Budgets are submitted to the CFO and a review process commences, possibly involving a budget committee.
- Management team finalizes budgets for submission to the Finance Committee or the Board of Directors.
- Finance committee reviews, and either finalizes the budget or sends it back to the management team for revisions.
- Board reviews and grants approval, hopefully, for the upcoming budget year.
Now if this process appears more orderly and organized than what your organization does, don't fret. Organizations are different, and each has a unique way to finalize their budget. Our CFO would kick me in the shins if I didn't mention that creating a budget is critical. Working without a budget is kind of like being a skydiver who operates without knowing if they have a working parachute, or whether they even remembered to put the parachute on.
The budgeting process for technology needs to be included in the plan. After conducting more than 40 discovery assessments in the past three years, I've seen a wide range of practices when it comes to IT planning and budgets. The least effective approach is when the IT Manager believes that someone else should provide them with a budget. This is a widely held problem for managers who don't have a finance background or have not received much mentoring in finance. I was fortunate to take a “Finance for Managers” course at UC Berkeley many years ago. It has proved very helpful. It should be a prerequisite for anyone who is or wants to be a manager.
How to start creating your IT Budget:
First, don't open Excel. The temptation - and I'm as guilty for doing this as anyone - is to begin creating lists of expenses. You don’t want to jump directly into the budget because you may be working with incorrect assumptions, one of which is that you can identify all of the expenses. When developing a budget you need to know the plan. Let's start there.
- Know what the organizational plan is for the upcoming year. ASK:
- What projects and goals do other departments have for the year?
- What is changing in one department or across the organization?
- What are the organizational goals?
You need to be able to understand this in order to plan expenses effectively. This isn't easy to do and it takes some time. The process can be even more difficult if you work in an organization that does not have a strategic or work plan. This is less problematic for an executive manager who has experience in an organization for 10 years or more, but it is very difficult for a manager with fewer years under their belt. And if the department managers don't know where they're going, it becomes very difficult to forecast expenses.
- Armed with insight about the goals, projects, and organizational plan, your next step is to gather the baseline budgeting data. That data should come from two sources: your own existing list of expenses that you are aware of, and the expense report from the Accounting department. If you don't currently receive these reports, you’ll want to request a report of Actuals vs. Budgeted expenses for all IT and telecom.
If you have these reports, or the Accounting department is able to furnish them for you, you may find that all of your expenses are not actually listed. You may discover that the server you purchased this past year isn't represented on the report - welcome to the world of Capital vs. Operational expenses Capital expenses have to do with items, called assets, that have exceeded a certain dollar threshold (say $1,500), and have an extended life of three years, or more commonly five. In other words, these are the investments (on equipment for example) projected to help your business continue to grow and produce more income over time. The expenses accrued in an operational budget on the other hand, covers daily operating expenses, such as wages, rent, utilities, etc. Not all organizations have capital expenses for IT because some organizations haven’t created or considered a capital budget. If you think this is starting to look like two totally different budgets, you are correct. Depending on your organization, you may have to create a capital and an operating budget for the upcoming fiscal year. However, this is not always the case. Look to the Accounting department to help you figure out what is needed. Try working with them to determine if you need to create a capital budget. They may be surprised to hear from you, but I have a feeling it will be welcomed and appreciated. Congratulations; you've now made friends with the bean counters.
Building the IT Budget:
If this is beginning to make sense, you should start thinking about the steps you have completed thus far. You should know the plan, and be able to forecast your necessary budgets (capital and operational). Also, make sure you have a report from accounting that outlines the ‘actual’ expenses vs. ‘budgeted’ expenses. Good, now you're really armed with some information.
It is time to start thinking about where IT fits in to better support the organization. This is a two-part process: firstly, you will think about products or services that might require a new or updated solution; secondly, you will verify the existing expense items that you know are not going anywhere, anytime soon. I usually like to start with the latter. Now pull out Excel and start reviewing those expenses from the report provided by accounting. From here, you can build and update your Excel spreadsheet.
One of the key components of building an accurate IT budget is to understand which expenses fall under IT. You will want to take some direction from the Accounting department. Regardless of which budget the expenses fall under, it is important that you identify all technology related expenses, and there are often places where you don’t initially know to look. For example, some departments are responsible for purchasing their software and paying the annual maintenance. Other departments will have incidentals or subscription services. Across the organization, there could be a growing number of expenses that have technology implications. Try to understand where these expenses exist, what the needs are, and if there are any opportunities for consolidation or improved service delivery. You can work with your departments by being open and transparent, and practicing regular, consistent communication.