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IT Managers Know That It Takes a Human to Make a Budget
By Jim Anderson

Wouldn’t it be great if there was some magic machinery somewhere that we could all go to, push a big red button, and then your team’s budget for the year would pop out. As wonderful as this would be, such a machine does not exist. This means that the process of creating a budget involves real human beings. This means that things are going to get messy…

The Problem With Top-Down Budgeting

For most IT teams, annual budgeting is done in a top-down fashion. This means that the company’s senior leadership makes decisions about what the company is going to spend its money on and then sets goals based on these decisions.

When you are creating the budget for your team, you will have to take into account the company’s goals for things like profit and revenues. Although they may not directly affect your team, they will impact how much and what types of funding you’ll be able to receive.

Top-down budgeting is not without its own set of problems. The first of these is that the company’s senior management may have no idea about the issues and challenges that your team is facing. That means that the goals that they set for the company may be in conflict with your team’s goals.

Additionally, since you weren’t involved in setting the company’s goals or direction you may feel disconnected from the goals that have been set. This will make it harder for you to set your team’s budget and goals in order to support the company’s goals.

Dealing With Slack

Slack, or as it is sometimes referred to as “padding”, occurs when an IT manager adds additional funding requests to his or her budget in order to give themselves “wiggle room” if unexpected expenses pop up. This may also be done in order to make sure that the manager appears to have done a better job of managing their budget at the end of the year.

The problem with slack from the company’s point of view is that if every IT manager adds a little something extra to their budget, then the cumulative effect could grow to be quite large. In order to prevent this from happening, the company needs to put incentives in place to encourage managers to create accurate budgets that only reflect what they truly need.

Why Sensitive IT Manages Ask “What If”

No matter how impressive an IT team’s budget looks on paper – all of those columns of numbers and such, it is still a guess. Every budget is built on a set of assumptions that may either be right or wrong.

Not all of the assumptions that you’ve made may be correct. In order to find out what the impact of you being wrong on one or more of your assumptions would be, it is often helpful to perform what is called a “sensitivity analysis”.

In order to do this, you vary one of your assumptions and you take a look at what its impact would be on your budget. This allows you to play a number of “what-if” games in order to determine what alternative scenarios you should take the time to develop.

What All Of This Means For You

Creating a budget is not a nice automated process in which a set of inputs produces a nice, neat budget for your IT team. Instead, there are multiple people involved and this means that things can get messy.

Creating a budget is done differently at every company. Often the budgeting process is done in a top-down fashion and this can cause conflicts when your senior management is out of touch with the realities of your team’s job. This can lead to you adding slack, or padding, to the budget that you create in order to deal with anticipated unknown events. Finally, every budget is built on a set of assumptions and so what-if scenarios and sensitivity analysis need to be done in order to ensure that your assumptions were accurate.

Creating a budget for your IT dream team is not an impossible task. Rather, it is a very human task that will have many different challenges associated with it. Take the time to understand what you’ll be facing and you’ll be able to adjust how you go about creating your budget in order to successfully deal with them.

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, You can subscribe to his newsletter here.

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