Getting the resources your team needs is a matter of knowing just enough about finances to communicate what you want, and explaining how it will benefit the company. The trick is to speak their language. Learn the basics of budgeting, benchmarking, resource allocation, cost-benefit analysis, and communicating costs using tools like net present value. Understand the importance of your business cycle and the difference between cap-ex and op-ex. These are slides from a half-day course that also covers spreadsheet magic, like pivot tables and pivot charts.

1. Winning the Budget Game
How to Get the Money You Need for IT Every Time
Nicole Forsgren, PhD
Assistant Professor
Utah State University

2. Introductions
• A little about me
• A little about you

3. • Balance Sheets
• Income Statements
• GAAP
We’ll leave that for the Accountants
This is NOT Financial Accounting

4. • Data-driven business decision making
• Using any internal information to make better
decisions
• Not just typical accounting information – even
though it’s all accounting information
• Accounting information is:
• Information used to inform activities
• Information used to control activities
• Information used to judge or rate activities
This IS Managerial Accounting

5. • CapEx vs. OpEx
• Important cycles and dates
• Relevant decisions
• Cost benefit analysis
• Budgeting
• Metrics
• Comparing alternatives
• Tools
• Resources
What we’ll be covering

6. CapEx vs. OpEx
• Capital expenditures (CapEx)
• What is capital?
• Operational expenses (OpEx)
• Contracts and services
• Supplies
• Depreciation
• Equipment refreshment – that doesn’t fall under CapEx

7. CapEx vs. OpEx
Are there any special rules, limits, or inclusions
in your organization?
What are the breakpoints?
Can contracts for services be restructured so
that OpEx  CapEx?
CapEx and OpEx Takeaways

8. Important Cycles and Dates
• What cycles does your company use?
• Product release
• Budgeting
• Purchasing
• Hiring
• Performance evaluations
• Pay increases
• How do these cycles impact IT operations planning?

9. CapEx vs. OpEx
What dates are important to your organization?
• Product release
• Budgeting
• Purchasing
• Hiring
• Performance evaluations
• Pay increases
Put these on a calendar or something visible to
your IT function
Cycles and Dates Takeaways

10. Relevant Decisions
• Include
• Relevant, or “differential” information
• Opportunity costs
• Do NOT include
• Sunk costs

11. Cost Benefit Analysis
Presenting the cost of something vs the perceived
benefit that results
• Assemble all costs
• Estimate all savings or benefits
• Ignore sunk costs
• Combine into similar analysis – all in same units
– Traditionally in dollars; could be in cycle time, etc.

12. Cost Benefit Analysis
• Capital expenditures
• Depreciation, lifespan
• Software + licensing, service
• Labor to design, install, maintain
• Space (power, cooling, colo leasing, network
• Recurring maintenance
• Decommissioning legacy hardware or service
• Make sure costs are all in the same units
(generally $)
Assemble all costs

13. Cost Benefit Analysis
• Increased productivity, efficiency, sales
• Reduced labor costs
• Reduced maintenance/license fees
Additionally…
• Costs of not doing it
• Cost of failure
• Cost of Plan B
Estimate all savings or benefits

14. Cost Benefit Analysis
• Human nature often reminds us of sunk costs
• We often get preoccupied here
• Management often gets preoccupied here
• This is its very own slide to call attention to a
significant issue
Be careful to ignore sunk costs

15. Budgeting
Getting a bigger portion of the budget
• Budgeting vs. profit planning
• Continuous budgets
• Understanding how budget impacts operations

16. Budgeting
• This is already done for each cost center. Is it coming
from you?
• IT is a cost center, and will be evaluated based on
your budget
• “Cost center” isn’t a bad term; it’s an accounting
term
At organizational level, also
called profit planning

17. Budgeting
• Month-by-month estimate of costs (often based on
historical data and averages)
• Rolling budget – always have 12 months
• Which means you should always be planning a
year out
Continuous budgets

18. Budgeting
• Cost of resources
• Labor (plus overhead)  biggest portion of your budget
• What is your overhead rate?
• Other expenditures
• New initiatives
Justifying expenditures requires a knowledge of cost
and how they fit into the overall operations budget.
Understanding empowers you.
How budget impacts operations

19. Budgeting
• What budget categories are use it or lose it?
• What categories roll over?
• What is your fiscal year? Are there spending cutoff
dates?
Again, understanding empowers you.
How budget impacts operations

20. CapEx vs. OpEx
• What is your budgeting cycle? Who does it? Can
you be involved? (Might be called “Capital
Planning”)
• What is your labor overhead rate?
• What categories of funds are use it or lose it? What
rolls over?
• What is your fiscal year? What are your important
dates for spending?
Budgeting Takeaways

21. Metrics
• Measuring yourself
• Checking in

22. Metrics
• Recommended
Reading: How to
Measure Anything,
Douglas Hubbard
Measuring Yourself

23. Metrics
• Benchmarking
• Burn rate
• Tells you at what rate you are spending
money
• Variance analysis (aka Standard costs)
• Formal
• Informal / making your own
Checking in

24. Evaluating Expenditures and
Comparing Alternatives
• Communicating costs
• Net Present Value
• PV Index
• Payback time
• Internal Rate of Return

25. Evaluating Expenditures and
Comparing Alternatives
• Cost of technical debt and refactoring
• Cost to develop an in-house solution
• Cost to maintain legacy systems
• Hidden costs
Communicating Costs

26. Evaluating Expenditures and
Comparing Alternatives
• Accounts for the time value of money
• How to:
• Identify all revenue and expense impacts and
when they will occur
• Identify a reasonable rate of return (from org:
generally blend of creditor and owner costs)
• Calculate Present Value of each
• Aggregate to find Net Present Value
• Can also be used to compare alternatives
Net Present Value

27. Evaluating Expenditures and
Comparing Alternatives
Alternative 1
Net Present Value: 2 options
Alternative 2
• Purchase new equipment,
$80,000.
• Useful life is 5 years with $4,000
salvage value.
• Incur $3,000 in training costs.
• Will reduce annual operating
expenses by $21,500.
• Replaces equipment with trade-
in value of $5,000.
• Purchase new equipment,
$115,000.
• Useful life is 5 years with $30,000
salvage value.
• Incremental revenue $69,000 per
year.
• Increase annual operating
expenses by $32,000.
• A $20,000 major overhaul at the
end of third year.
Desired rate of return is 14%

28. Net Present Value: Alternative 1
• Purchase new equipment, $80,000.
• Useful life is 5 years with $4,000 salvage value.
• Incur $3,000 in training costs.
• Will reduce annual operating expenses by $21,500.
• Replaces equipment with trade-in value of $5,000.
Desired rate of return is
14%
0.519: from PV of $1 table, 5 years, 14%
3.433: from PV of an Annuity of $1, 5 years, 14%
Item Year Amount PV factor PV amount
New equipment 0 $(75,000.00) 1 $(75,000.00)
Salvage 5 4,000.00 0.519 2,076.00
Training 0 (3,000.00) 1 (3,000.00)
Savings 1-5 21,500.00 3.433 73,809.50
NPV $(2,114.50)

29. Net Present Value: Alternative 2
• Purchase new equipment, $115,000.
• Useful life is 5 years with $30,000 salvage value.
• Incremental revenue $69,000 per year.
• Increase annual operating expenses by $32,000.
• A $20,000 major overhaul at the end of third year.
Desired rate of return is
14%
Item Year Amount PV factor PV amount
New equipment 0 $(115,000.00) 1 $(115,000.00)
Salvage 5 30,000.00 0.519 15,570.00
Increased revenue 1-5 69,000.00 3.433 236,877.00
Increased expenses 1-5 (32,000.00) 3.433 (109,856.00)
Overhaul 3 (20,000.00) 0.675 (13,500.00)
NPV $14,091.00

30. Net Present Value:
Comparing Alternatives
Item Year Amount PV factor PV amount
New equipment 0 $(75,000.00) 1 $(75,000.00)
Salvage 5 4,000.00 0.519 2,076.00
Training 0 (3,000.00) 1 (3,000.00)
Savings 1-5 21,500.00 3.433 73,809.50
NPV $(2,114.50)
Item Year Amount PV factor PV amount
New equipment 0 $(115,000.00) 1 $(115,000.00)
Salvage 5 30,000.00 0.519 15,570.00
Increased revenue 1-5 69,000.00 3.433 236,877.00
Increased expenses 1-5 (32,000.00) 3.433 (109,856.00)
Overhaul 3 (20,000.00) 0.675 (13,500.00)
NPV $14,091.00
Use PV Index:
Inflows / Outflows
= 75,885.5 / 78000
= 0.97
= 252,447 / 238,356
= 1.06
1
2

31. Evaluating Expenditures and
Comparing Alternatives
• Ignores time value of money
• Good for “back of the napkin” calculations
• Only use initial expenditure and annual cash inflows
• Example: Alternative 1
• Initial investment $80,000
• Reduce annual operating expenses by $12,500
• Payback period is 3.7 years
Payback Period

32. Evaluating Expenditures and
Comparing Alternatives
• Recognizes time value of money
• Using only initial expenditure and annual cash inflows,
tells you the rate of return for the project
• Example: Alternative 2 (we know > 14%)
• Initial investment: $115,000
• Net annual cash inflows: ($69,000-32,000)=$37,000
• 5 year project
• Divide initial investment by cash inflows = 3.11
• Refer to NPV annuity table ~18-19% returns
IRR: Internal Rate of Return

33. Spreadsheets
• Spreadsheet nightmares
• Overly complex
• Stale data: manually entered, nothing linked
• Missing data
• Why are you using a spreadsheet?
Spreadsheets

34. Spreadsheets
• Basic rules of spreadsheets
• Have a data source – single input area
• Simple
• Self-documenting
• Use versioning
• Clean use of constants and formulas
• Check your output
• Formatting output for readability
Spreadsheets

35. Spreadsheets
• A simple test
• Can you understand it in 3 months?
• Can someone who has never seen it understand
it?
Spreadsheets

36. Spreadsheets
• Pivot tables allow you to look at the same
data multiple ways
• (go to example)
Spreadsheets

37. Resource Management
• What are resources anyways?
• People
• Hardware
• Software
• Power, space, cooling
• Time
• Why do we care?
• Requesting resources
• Maintaining resources (includes time and $)
• Use resources as a negotiating tool

38. Thank you!
nicolefv@gmail.com
@nicolefv
nicoleforsgren.com