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The budgeting process

In the previous article, Seeing eye to eye, I set the scene – you’re an engineer overseeing a large IT project that requires raising funding from the company board and for which you will be responsible. In this article I jump a little ahead in the process in that I discuss presenting the budget to the company board so that you can understand the type of questions they are likely to ask you. In the article that follows, I take these questions into account when discussing the drafting of the budget.

The principle objective of a company

Keep in mind the number 1 reason for a business’ existence: sustainably make money for its shareholders. Even an NGO has a duty to its funders to ensure they operate financially responsibly. If your project is not going to have a reasonable return on investment and it does not aid another area of the business to make/save money or misses the strategic vision of the company or reduce company risk, then the sensible thing for the business to do is rather take that cash and put it into an interest-bearing account until they come up with a better idea.

The budgeting process

The problem with our scenario is that you’re already too late to the party. Budgets for this financial year have been allocated and usually 3-5 years’ worth of budget forward planning is done and dusted. This explains why when a project runs over people are not just annoyed about overspent budgets, missed deadlines, placing other areas or even the entire company under stress because the current budget needs rework. The budget forecast for the following financial year may be affected too and have long term ramifications. This does not make CFO’s very happy campers.

Key questions from the executive team

So you’ve missed the boat and now the project is pushed out to the next financial year as all spend has been allocated for this year. To secure funding you’ll need to present a budget to the board and defend it with a business case. The single most important question you have to answer is “How much is it going to cost?” There are other very important questions to answer but those are secondary. If you present a seemingly flexible or “agile” response such as “It depends on what the business want as we progress” (which is not Agile) expect to be packing your desk or at the minimum have your ears ringing from a grilling from the CFO and CEO. Be prepared – you’re in for a grilling regardless, which is good. The board has a duty to its shareholders and staff to thoroughly question such investments. It could have serious consequences for the company. Below is a (hardly exhaustive) sample of the different types of questions key decision makers will ask and how differently they view the situation. Try see it through their eyes:

  • CFO: How much is it going to cost? How much is it going to make and/or save the company and over what period, i.e., what is the return on investment (ROI)? How did you come up with these figures? Explain budget line item X’s spend. What are the future costs? What do you have allocated for unplanned expenses (contingency)? What are the payment terms? Did you negotiate discount? How long will it take to implement?
  • CIO/CTO: A whole lot of technical and governance related questions.
  • COO: How are operations affected? Yet another set of systems to look after and maintain!? Swapping over to new system is going to have down time and require training. Has this been factored in? What is your plan? What are expected operational costs? How many operational staff will need to be involved in this project and how much time will they need to dedicate to it?
  • CMO: How are customers effected? How is it going to make us more agile as a company? Is it going to improve our image? Is it going to prevent our competitors from taking some of our market?
  • HR: Will jobs be affected? Will we need to make people redundant or upskill or hire new staff with specialist skills? Are you planning insourcing with contractors or permanent, or partner with consultancies to deliver? How is this going to be supported going forward, how is that going to be resourced?
  • CEO: What are the key problems this will resolve? Does it fit in with the corporate vision and strategy going forward? What is the risk if we do it? What is the risk if we don’t do it? How will the shareholders respond? What’s plan B and C?

The important point to take from this is that each executive will see the budget from a completely different perspective. When preparing your budget and delivery plan you need to take these perspectives into account so that you can adequately address their concerns. In the next article (Finance for Technologists: Part 2 – drafting and managing your budget), I’ll discuss what you need to consider when drawing up your budget so that you're able to defend it when presenting it to the board.