Have you ever wondered how your company pays its bills? I mean, every day when you come to work, the lights are on, the security guard is working, and food is served in the cafeteria. Somehow, thanks to the efforts of your company’s leadership, that is all getting paid for, but how? The secret my dear IT manager lies in the world of working capital…

1. What IT Managers Need To Know About Working
Capital - IT-Toolkits.org
Have you ever wondered how your company pays its bills? I mean, every day when you come to work,
the lights are on, the security guard is working, and food is served in the cafeteria. Somehow, thanks
to the efforts of your company’s leadership, that is all getting paid for, but how? The secret my
dear IT manager lies in the world of working capital…
What Is Working Capital?
We’ve all probably heard of “capital” and “working capital” before, but what is it? In short, working
capital is the amount of money that a company has available to spend today. A fancy way of saying
this is that working capital is a company’s liquid finances – it can get its hands on it right now.
You would think that having more working capital than less would always be a good thing, right?
Well, yes and no. Clearly having access to too little working capital can put a company in a bad
position – management may not be able to pay their bills. However, at the same time having too much
working capital may result in the company having to pay financing costs (that working capital had to
come from somewhere).
The Impact Of Inventory?
All too often working capital is not just laying around at a firm in the form of piles of cash. Although
that sure would be nice. Instead, it’s often tied up in the company’s inventory. This may go a long
way to explain why so many of the projects that your IT dream team works on have to do with
inventories. Just like working capital, a company doesn’t want to have either too much or too little
inventory.
The balance here is that if a company carries a lot of inventory they can quickly fill customer
orders. That is a good thing. However, having a lot of inventory also means that any unsold goods
are getting older every day that they sit on the company’s warehouse shelves. Depending on how fast
things change in the industry that your company competes in, the value of the items in your
company’s inventory may be decreasing by as much as 2% per day!
What All Of This Means For You
Just like a car that needs to have gas in its tank in order to be able to go anywhere, a company needs
to have working capital in order to pay its bills. Careful management of this valuable resource is
required in order to ensure that the company does not have either too much or too little of it.
One of the key areas where working capital will show up in any company is in its inventory. Much of

2. what an IT team is called on to do will probably have something to do with managing or tracking the
company’s inventory.
Realizing the importance of working capital is something that every IT manager needs to do. This
understanding can go a long way in making sure that you are able to grasp the motivation behind
decisions that your upper management makes.
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Within the project management context, begins with estimating. As a practical matter, there are three
(3) primary uses for project “cost estimating”:
1. To identify and quantify potential (and probable) project “cost factors” (i.e. what will we have to
spend money on?).
2. To estimate related cost values and create an appropriate, realistic budget (i.e. how and when
funding will be spent).
3. To track estimated costs (as they become actual expenditures) and monitor any and all resulting
variances.
Cost Control is Part of “Managed Change”
Since project cost estimates are just that – estimates, and it is unlikely that related project budget,
resulting from these estimates, can be etched in stone. Projects have a pulse, and the circumstances
and conditions under which projects occur can, and do change, impacting costs and expenses. To
deal with this uncertainty, project managers often apply a “contingency factor” when preparing a

3. project budget. This contingency factor normally consists of a 5 – 10% boost of anticipated project
expenses in order to uncover inexperience, as well as the “unknown” or the “unexpected”.
Contingency or “Not to” Contingency. That is the question…..
Depending on the degree of internal experience with a given type of project, contingency reserves
may or may not be necessary. In addition, there is a philosophy that says that contingency reserves
are dangerous, leading to unwarranted project spending.
Budget Contingency Pros: The extra funds are in hand when needed, without seeking further
approval. Considering that project circumstances can change so frequently, contingencies readily
acknowledge this fact, facilitating project completion.
Budget Contingency Cons: Contingency reserves make it easier to gloss over project costs,
making budgets less precise. Contingency reserves encourage cost overruns, by granting easy
access to additional funding without a thorough consideration of available alternatives.
To-Do List: (4) Key Steps to “Trackable Costs”
The following listing lays out the four (4) primary steps for project cost estimating and tracking:
Step #1 Make the continency decision.
Contingency budget decisions should be made at the start of the budget estimating process. Will you
need a contingency budget, and if so, in what amount, and how will it be used?
Step #2 Identify the cost factors.
While cost factors will vary based on project characteristics and business circumstances, in general,
project costs can be viewed from four basic perspectives – labor, capital investments, overhead (to
maintain the project environment) and project specific (costs to plan, manage and execute the
project):
Step #3 Establish cost factor values.
Project budgets quantify the expected costs associated with a project, and these budgets must be
based on a reasonable, realistic estimate of likely project costs and expenses. The estimation of
project costs is part science, and part intuition, common sense and experience.
In fact, past projects can be the most valuable indicator of current project expenses. As project costs
are estimated, the following factors should be considered:
The specific cost factors involved depending on the needs of the project.
The costs of similar projects in the past.
The opinions and feedback of project participants. When estimating costs, it is important to get a
broad spectrum of information, experience and opinion.
Step #4 Track expenditures and variances.

4. Once the project budget is created and approved, and the project is underway, costs and expenses
must be tracked to ensure that budget utilization is as planned and expected (are you spending what
you expected to spend based on how the project is proceeding?).
Variances Happen. That’s not good or bad in and of itself. If variances exist (and they will), you
must determine whether the variance is “positive” or “negative”, and what it all means. Then you
can “react” and act accordingly.
A positive variance indicates that you are under budget, but appearances to the contrary
notwithstanding, this are not necessarily a good thing. When project expenses are less than
expected, this may be a sign that the project is not proceeding according to plan, and may be behind
schedule. In addition, a positive variance may be a sign of ineffective estimating. On the other hand,
this under budget condition may be the result of legitimate changes, discounts, or cost saving
measures.
A negative variance indicates that the project is over budget. Depending upon whether the negative
variance is at a monthly or overall project level, this variance may be the result of serious project
problems, such as excessive changes, schedule delays or ineffective budgeting. If the negative
variance is on a monthly level, but the overall project is on track, there may not be an immediate
cause for concern.
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Step 1: Set Budget Goals and Strategies

5. Once you are aware of your budgeting “realities”, you can begin the process of identifying related
priorities, which will shape and refine actual budget results.
Will it be possible to maintain the budget and still provide the necessary services and projects?
If not, what items in the budget can be reduced to compensate?
If budget cuts are in order, how will essential services and projects still be provided?
How will difficult budget decisions be made and communicated?
How will you deal with staff disappointments and end-user complaints?
Step 2: Identify Budget Components
How will IT funding be spent considering staffing, capital investments, supplies, overhead, facilities,
travel and related expenditures?
Step 3: Identify Service Priorities
What are the identified priorities for the IT service portfolio and what are the related operational
costs to deliver these services?
Step 4: Identify Business Priorities:
In order to prepare a realistic IT budget, you must have a solid grasp on business priorities.Based on
business type, current conditions and circumstances, likely business priorities will likely include any or
all of the following:
To cut IT (acquisition and/or operational) costs and related expenditures.
To improve workplace and IT management productivity.
To deliver new or improved technologies.
To eliminate technology (system and/or operational) problems.
To improve IT service delivery and related customer service satisfaction.
To improve performance of in-place technology systems and solutions.
Step 5: Align IT Priorities with Business Priorities:
The final step in this budget planning process is to align IT priorities with business priorities, aligning
technology spending, IT services and related projects with established business goals (all as part of
the IT management vision). As you begin this alignment process, you first need to look at your budget
as a whole in terms of overall goals and management directives.
This is the time to expand the planning scope and make tough decisions.
Do you need to maintain, cut or increase the current budget from prior budget levels?
If you need to maintain the budget levels from your prior budget, will you need to eliminate or defer
any projects or planned initiatives that would require additional spending?
If you need to cut (reduce) budget levels from your prior budget, how will those cuts be made?
Across the board (equally to all budget items)? Apportioned to specific budget items, leaving
others intact? Apportioned to specific budget items, allowing for necessary increases in some

6. areas, with corresponding cuts in others?
If you need to request budget increases, can those increases be justified on the basis of IT and
business priorities?
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