5 Steps For Creating An Operating Budget
By Jim Anderson
One of the most important parts of being an IT manager is your ability to create an operating budget for your team. In order for your team to be able to accomplish everything that is expected of them, there will be costs and they’ll do things that (hopefully) generate revenue for the company. If you can show some leadership and get this operating budget right and convince your management to provide your team with funding then your team will have enough fuel in their tank to make it through the year, get it wrong and you’ll end up sitting by the side of the road…
What Is an Operating Budget?
If we’re going to spend some time talking about how to create an operating budget, then perhaps we should start out by making sure that we both understand just exactly what an operating budget is. First off, an operating budget is a target – it’s not a forecast.
An operating budget specifies the revenue and the costs for your IT team for the coming year. The form of this kind of budget looks very much like the income statement that every company generates. The only real difference is that you’ll create your budget using expected quantities instead of real quantities.
5 Steps For Creating An Operating Budget
The process that you’ll go through in order to create an operating budget for your team can be divided into five steps. These steps are as follows:
- Calculate the revenues that your team will generate: the IT projects that your team will deliver will eventually be used by the company in some way to generate more revenue. You need to take the time to calculate exactly how much new revenue can be attributed to the work that your team will do this year.
Determine how much each of your it projects is going to cost: clearly you are going to have to be given money by the company in order for your team to complete the projects that it will work on this year. You need to sit down and map out how many projects your team will be assigned and then how much funding you’ll need in order for the team to complete each of these projects.
Determine other costs: in addition to costs associated with the projects that your team will be working on, you’ll have other costs that need to be taken care of during the year. These may include new hardware / software for your team, training, and perhaps even adding additional staffing.
Calculate the expected operating income for your team: using the numbers that you’ve already laid out, you now need to do some subtraction and find out (hopefully) how much more money your team’s efforts will bring in to the company over what the team is going to cost the company this year.
Develop alternative scenarios: having created your operating budget, take the time to stress test it. Create several “what if” scenarios that allow you to test different conditions in order to determine what would happen to your budget if any of those conditions actually happened.
What All of This Means for You
One of the most important jobs that an IT manager has is to ensure that his or her team has enough funding to accomplish everything that will be expected of them during the upcoming year. In order to get this funding, an operating budget has to be correctly prepared.
An operating budget specifies the revenues and costs that your team will have during the upcoming year. In order to create it you first need to calculate the revenues that the company will realize based on your team’s work. Next you’ll have to determine how much each of your IT projects is going to cost. This is followed by determining what the cost of other items such as tools and training will be. Using these numbers you’ll be able to calculate the expected operating income for your team. Finally, you’ll need to test your budget by exploring various alternative scenarios.
Creating an operating budget can seem like a daunting task the first time that you are asked to do it. Take the time to consider all of your costs and all of the revenues that the company will be able to realize based on your IT dream team’s work. Once you have these numbers, creating the operating budget for your team should be easy to do.
Jim Anderson has been a product manger at small start-ups as well as at some of the world’s largest IT shops. Dr. Anderson realizes that for a product to be successful, it takes an entire company working together. You can learn more about Dr. Anderson on his website, http://www.TheAccidentalPM.com. You can subscribe to his newsletter here.