The importance of establishing a budget for IT (Part I)
When making decisions and deciding to start off with a new project, budgets are essential tools as they allow a prior knowledge of the financial flows that will be produced and that contribute to determine the level of profitability based on income and costs.
Budgets are a management tool that can be understood as a financial plan considered for a project, which plays a vital role when planning for the company’s activity or the development of a new project. Fund administration is required for the estimation of a budget, since one of its roles is influencing the company’s decision-making processes. Serving this purpose, the company’s capability of investment and its possibility of recovery are estimated through the calculation of profitability.
Defining a budget should follow different objectives, such as:
- Knowing the initial and total investment that must be done to implement a new project.
- Determining the sources of funding for the required investment.
- Defining the payback period for the investment
- Estimating the profitability and establishing how feasible the project is, taking into account opportunity cost
- Determining the life cycle of the project
Establishing a Budget in a business is crucial to:
- Accomplish reachable financial information for all users
- Guarantee that the organization of the activities is feasible and in accordance to the available resources
- Identify the areas with higher or more frequent deficits
- Transparently establish the relationship between cost/receipts/invoices with the budget of activities, with the purpose of certifying the work’s feasibility, and to avoid that the resources are consumed in activities that are not earmarked.
- Provide the personnel with a cost follow up and to guarantee a balance in the budget
- Give the report to funders, since costs are related to the budget
- Increase the cost-benefit relationship, as long as each of the elements is calculated correctly, which makes it easier to know the availability of the investment and analyze the costs linked to the investment.
- Decrease the costs and optimize the utilization of the earmarked
This procedure is applicable to any business area in a company. Currently, IT has gained relevance because of the demands and technological trends in the different areas of the organization and the market.
The IT budget tends to be supervised by the IT Manager, or the IT chief executive in the organization. However, since it has become decisive for the results of the business, the scope and designation of an IT budget has complexified, because not all the expenditures in IT fall into the area of the IT department.
In fact, recent studies have found that between 35% and 50% of the total expenditures of an organization in technology is controlled by different business divisions. In other words, frequently, 40% of the yearly expenditure by the IT department was not within the annual budget projection.
Stay in touch with us if you would like to read about the creation of a successful IT budget this coming January 2nd.
Author: Dayana Guzmán