LTYM - Creating an Internal Capital Budget

Letters to a Young Manager

Creating an Internal Capital Budget, #53
LTYM > Financial Management

Dear Adam,

***

You are complaining that you can't get your strategic projects done without a capital budget. You are correct. A capital budget is the financial means to spread out the costs of implementing a system across its useful life. It's also easier to get the project approved.

If you are unable to convince your CFO and senior management team to allocate a capital budget to IT, then you need to create one. How, you ask? Work with your CFO to agree that any savings you create in IT will be rolled into an IT capital budget. This in effect creates 3-5 times the capital budget, depending on your depreciation schedule. Then agree to hold to the high water mark on depreciation so that in future years as project depreciation winds down, you have buying power for the next projects.

This won't work for all projects. The larger, enterprise-sized projects likely require a significant investment. However, showing that you can finance a portion from within the IT budget will indicate you are willing to put some skin in the game. That's easier to say "yes" to.

***

Sincerely,
Ed

________________________

References...

Takeaways:

Investment funds created out of operations are the easiest to get approved

Discussion Questions:

1) Do you have a capital budget? If so, what percent of your total IT budget is it and how has it changed over the last five years?
2) What are some ways to save IT operating budget to invest it in a capital budget?
3) What is your response to a CFO who says any savings must go to a general pool of savings for the organization to apply to priority projects across the organizations, and likely in other departments? How does this decision impact the motivation to find more savings?

For Further Reading:

1) See "Five ways to create budget," Letter #185