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F E A T U R E

Budget Management 101

March 4, 2002
By Dave Molta


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Most of us struggle trying to manage our household budgets. It shouldn't come as a big surprise, therefore, that IT managers often struggle to stay on top of technology budgets, many of which include a fair number of zeros. What's worse, a large percentage of IT managers are middle managers who have risen to their positions based greatly on their technical skills. If you had to develop a short list of skills that could make or break an IT management career, budget management would almost certainly make the top five.


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Developing sound budget skills doesn't mean going back to school and taking a few management classes, though that might indeed make sense for some people. It also doesn't mean you should become so enamored with finances that you ignore the other critical elements of your job. Instead, it involves an understanding of some basic concepts, the knowledge of what financial information you need to perform your job and the development of a disciplined approach to budget management.

Nuts and Bolts

Let's start with the basics: the distinction between capital budgets and operating budgets. At the risk of oversimplifying, capital budgets are used to acquire assets while operating budgets are used to maintain assets. In some organizations, these two budgets may not be viewed independently and may not have unique budget codes. But they probably should.

For most IT organizations, the operating budget represents the vast majority of total expenditures. That's because personnel expenditures -- usually the single greatest portion of any IT budget -- represent recurring operating expenses. Other key elements of the operating budget include software and hardware maintenance, staff-training costs, consulting costs, travel and entertainment expenses, and incidental expenditures for consumable items, including office supplies.

Capital budgets usually are used for the acquisition of depreciable assets. Because depreciable assets, such as servers and workstations, are often an element of an organization's tax strategy, the definition isn't always so clear for nonprofit organizations. A discussion of the effects of the tax code on budgeting is beyond the scope of this article, but IT managers need to be aware that a decision to capitalize an expenditure may have tax implications. Sometimes, a leasing arrangement that results in higher total expenditures may be more cost-effective because of tax savings.

IT managers need to understand the relationship between capital and operating budgets, for hidden somewhere inside this equation is the total cost of ownership for the services you provide. For example, in your choice between two solutions offered by a network vendor, the system with the lower capital cost may in fact be significantly more expensive if it requires higher operating costs for staffing and maintenance.

In organizations where capital and operating budgets are treated separately, managers must be able to develop the skills to balance the two budgets. Take, for example, an organization that is constrained in its operating budget to the point where it has inadequate staffing, yet plenty of resources are available in its capital budget. The company may be able to convert future operating costs to capital costs by rolling the costs of maintenance, and additional staff support, into the capital acquisition costs. Likewise, if the budget balance is the converse, it may be possible to avoid capital costs through rental or leasing arrangements.