Savvy business leaders will always support wise IT spending. Meanwhile, astute financial management of IT gives CIOs flexibility to respond quickly to corporate actions such as the sale of a business unit or an acquisition.

This makes a properly managed IT budget one of the most important components in a CIO's arsenal. If you are to survive scrutiny by business heads, executive peers or potential acquirers, you must be prepared to properly explain each cost allocated, defend why you spent that money and demonstrate how it benefited the business. In this way, you provide a quantitative view of IT's value.

No doubt you agree, yet many IT budgets miss the mark. As a private equity IT advisor for Cerberus Capital Management, I examined dozens of IT budgets in varying industries. I found many that were so fragmented that the details could not be reconciled with aggregate line-items. In others, centralized costs were allocated equally across lines of business that used IT to different degrees and with varying benefits. Many budgets didn't carry their forecasts beyond one fiscal year. Nothing is more disheartening to a major investor or internal business head than to review a multimillion dollar IT budget that cannot be valued, explained, reconciled and forecasted.

That's no way to create confidence. You need to structure your budget so that your expenditures can be fully explained and so you have enough flexibility to handle various corporate actions and reviews.

Show Where the Money Really Goes

No matter how strategic IT is to your company, from an accounting or investment perspective, it's going to be treated as a cost center. Your annual operating expenditures (OpEx) will be rolled into the selling, general and administrative expenses part of the income statement. IT capital expenditures (CapEx) are capitalized on the balance sheet and amortized over the useful life of the investment.

Your IT budget is probably handled in a similar way. However without the proper detail behind these gross amounts, assessing the quality of operations for your IT organization in a more practical manner will be difficult.

A best practice is to separate both CapEx and OpEx into three categories: strategic, deferred and lights-on. Capital expenditures that create future revenues should be bucketed as strategic. Capital projects that you didn't implement (due to budget cuts or other cost-containment reasons) but which are necessary for growth should be categorized as deferred. Finally, spending as a part of annual refresh projects should be categorized as lights-on. Operational expenditures should be treated the same way: Remember that all capital expenditures result in ongoing expenses.

 

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