Budget management
Budget management is a continuous strategic process to limit, monitor, and manage cloud spending. It aligns budgets with business goals, ensures clear accountability, and achieves predictable financial outcomes.
Develop a cloud budget strategy
Develop a reserve policy that includes levels, percentages, and influencing factors.
Establish appropriate budget cycles, such as annual or quarterly.
Set budgets
Set budgets to apply reasonable constraints on teams that consume cloud resources.
Determine how budgets will influence and guide financial forecasts.
Track and manage budgets
Set acceptable variance thresholds for differences between "budget vs. forecast" and "budget vs. actuals".
Define exception handling procedures for when budgets need to be adjusted outside of the normal cycle.
Definition
FinOps budget management is the process of approving funds to support an organization's planned cloud activities. This process involves tracking spending and value against approved funds and making transparent adjustments as needed. It also ensures accountability for each budget cost center through a consistent set of budget policies.
Cloud budgeting often starts as part of a broader IT budget process and matures as cloud usage and complexity grow. Because of the rapid development pace and nearly limitless capacity of the public cloud, organizations must adopt shorter budget cycles. They also need to add flexibility with reserve funds and out-of-cycle adjustments. The FinOps team must work with the finance department, which is primarily responsible for budgeting, to establish and adjust budget and reserve policies.
Budget management is closely related to forecast management, planning, and estimation. A system or application budget is typically based on forecasts from the relevant teams. Budget management is also linked to the organization's cost allocation policy, which defines how to assign costs to different cost centers. Additionally, it relates to the billing and chargeback capability, which allocates costs to specific budget cost centers each cycle.
However, a forecast is a commitment from engineering and product owners to deliver value for a certain amount of spending. A budget is the organization's commitment of financial support to those owners. Budgets should clearly support the work of product teams. At the same time, budgets should apply reasonable constraints to keep teams working within their limits to create value for the entire organization.
Budgets are assigned to budget owners, who are responsible for work within a specific scope. Some organizations may have multiple levels of budget owners. Each budget owner is responsible for delivering one or more systems or applications. System owners continuously estimate the cost and other impacts of development work and maintain corresponding forecast models. When forecasts show that spending will exceed the budget, the different roles must collaborate to address the issues causing potential or actual overspending.
A budget for a documented scope of cost and value also typically includes a reserve allocation for the budget owner. This reserve fund has no specific purpose. It can be used for changes, overspending, forecast errors, and other minor corrections that arise during the budget period. As the organization matures, the reserve amount and its usage rules may be reduced, at least in areas like cloud workloads with stable budgets.
If a system owner determines that a budget adjustment is needed, follow these steps:
Budget threshold reports predict an overspend. (Engineering)
Investigate the engineering and product causes of the cost overrun.
Take the necessary steps for optimization.
Work with the Engineering, Product, and Budget Owners to allocate additional funds from the reserve.
If reserved funds are available and a reason for the adjustment is provided, additional funds are distributed.
Enables higher-level budget owners or finance departments to directly participate in the request review process, which can also include stakeholders from Engineering and Product.
Allocate additional funds from a higher-level reserve.
Involve management to adjust the budget and record or adjust the impact on organizational performance expectations. (Engineering, Product, Finance, Management)
Approve the budget adjustment.
Deny the adjustment and collaborate on necessary corrective actions.
The steps above assume that actual spending is unfavorable to the budget. "Favorable to the budget" means spending is less than planned. "Unfavorable to the budget" means spending is more than planned.
When an unfavorable budget situation occurs, immediate action is required. However, a highly favorable budget situation is also not ideal because large amounts of unused reserve funds could have been invested in other areas. After fully understanding the risks and uncertainties, budget owners and the finance department should work together to adjust budgets, even within a budget cycle. They should reclaim and use reserve funds that are no longer needed.
In organizations with simpler or more stable structures, budget adjustments should decrease over time, and reserve funds can be reduced each budget cycle. Organizations that are very active in their cloud usage or are experiencing high growth may need more reserve funds. They might also need more levels of budget owners to accommodate the inevitable need for fund adjustments due to unknown or dynamic workloads.
Shortening budget cycles or raising budget thresholds are also effective ways to manage change. More frequent budget cycles allow an organization to make adjustments, release unspecified reserve funds, identify forecast issues, and reallocate resources more often. Following this process enhances the organization's ability to respond to change, which makes even unplanned changes more routine.
The finance department primarily leads budgeting. However, following the principle that "everyone is responsible for their cloud usage," the organization should assign budgets and reserves to various budget owners. These budget owners can then work autonomously within their authorized scope without requiring frequent budget approvals. This practice helps the entire organization operate faster and more efficiently and prevents approvals from becoming a bottleneck.
Different organizations have different methods for budget management. Finance partners may work differently with certain departments based on the importance of their systems or business units. Research and Development (R&D) work, purely internal IT systems, and customer-facing systems might be handled differently. Financial budgets can also be combined with other resource budgets, such as labor costs, licensing costs, and cloud sustainability goals.
In government, the public sector, or highly regulated organizations, the source and timing of funds can also impose more constraints on the budget process. Compliance requirements add complexity. This can prevent the use of more efficient budget policies or may require more collaboration or steps to understand and follow the budget process. The FinOps team can help the organization understand these requirements and drive necessary changes as cloud usage increases.
Maturity assessment
Crawl
Simple or stable cloud environments do not require complex budget allocation or structures. Simple tools, such as workbooks, are used to track budgets by budget owner and system.
Budgets are created by manually reviewing and using forecasts.
Budget variance analysis is done manually or with standard reports.
Budget granularity is limited because of a lack of allocation compliance or a simple environment. Budgets cannot always be broken down by business unit or application.
The engineering department is not involved in creating cloud cost budgets or tracking variances between budget, forecast, and actual costs.
The reserve portion of the budget is managed centrally by the finance department because cloud usage is simple and stable.
The process for distributing reserve funds varies by situation and is entirely manual.
Budget cycles are annual to match other IT budget cycles.
Walk
More complex or dynamic cloud environments require more structured budget tracking structures and tools.
More complex forecast models are used to establish budgets.
Budget cycles are defined and run regularly but are not automated.
Stakeholder teams, including Product, Management, Engineering, and Finance, can view cloud cost forecast data and budget allocation information.
The FinOps team regularly reviews budget thresholds and trends with stakeholder teams and the finance department.
Reserve funds in the budget are managed by a few business-unit-level budget owners across the organization.
Processes exist for distributing reserve funds and resolving budget overruns, but they are not automated or widely used.
Budget cycles are a mixed mode of annual and shorter cycles. This applies to certain dynamic systems or systems with increasing cloud usage.
Run
Complex organizations and/or cloud usage require structured and distributed budget tracking and tool usage.
A global policy for allocating metadata is in place to avoid unallocated costs.
A complex forecast model is aggregated from many system or application teams. It uses various metrics and parameters to create predictions.
The budget and the organization's allocation structure are consistent. This structure is used when the organization reports on or allocates cloud costs.
The organization's Key Performance Indicators (KPIs) maintain fine-grained budget visibility by dimensions such as business unit, cost center, team, product, and service.
Stakeholder teams, including executives, Engineering, and Finance, can view a single source of truth in real-time. This helps them understand how cloud usage affects forecast trends and budgets.
There are integrated and automated data streams between cloud cost data forecasts, budget systems, and the record-keeping and backend accounting systems used for macro-level organizational reporting.
Reserve funds in the budget are managed by multiple budget owners across the organization.
Processes for distributing reserve funds and resolving budget overruns are widely automated and streamlined.
Budget cycles are short, such as rolling quarters, to accommodate ongoing activities. A consistent and automated approach is used to collect forecast data, allocate budgets, and establish reserve fund thresholds.
Functional activities
FinOps practitioner
Collaborates with all roles to develop and reinforce the use of budget and reserve policies.
Helps establish budget KPIs that align with business goals.
Explores optimization opportunities with teams that are projected to overspend.
Improves estimation and forecast models for cloud costs to help Finance and Management create budgets.
Provides teams with fine-grained reports on actual vs. budgeted spending, broken down by different business dimensions.
Provides reports on budget, actuals, and forecasts to identify change trends and compare them against variance KPIs.
Product
Develops product-centric KPIs to measure the cost-effectiveness of achieving expected business outcomes.
Monitors budget threshold variances for the products they are responsible for.
Collaborates with engineering colleagues to incorporate these KPIs into budget and forecast models.
Finance
Determines when forecasts need to be submitted and how often they should be updated.
Aggregates fine-grained forecast data to prepare budgets with reasonable accuracy.
Helps establish budget KPIs that align with business goals.
Provides teams with fine-grained reports on actual vs. budgeted spending, broken down by different business dimensions.
Provides reports on budget, actuals, and forecasts to identify change trends and compare them against variance KPIs.
Procurement
Monitors cloud spending budget vs. actuals to identify situations where overspending might affect commitments, vendor agreements, or spending expectations with cloud providers or other vendors.
Engineering
Monitors for cloud spending overruns or near-overruns.
Collaborates with FinOps stakeholders to identify viable optimization opportunities or estimate system changes to avoid overspending.
Uses a process approved by the budget owner to request approval for planned changes that would adversely affect cloud spending, value forecasts, or budgets.
Management
Continuously manages cloud budgets, forecasts, and estimates, and monitors their impact on the business.
Establishes budget threshold variances that align with business goals.
Adjusts the priority of active project timelines when forecasted spending affects the budgets of high-priority initiatives.
Ensures smooth communication between the FinOps team and business units.
Success metrics and KPIs
Budgets are based on amortized cloud usage data, adjusted for applicable discounts according to the budget policy.
The variance between budgeted and actual cost trends is within established percentage thresholds. Acceptable budget variance is a maximum of 20% for a Crawl-phase FinOps practice, 15% for a Walk-phase practice, and 12% for a Run-phase practice.
Notifications are sent to stakeholders when actual or expected budget variance exceeds the threshold or there is a risk of overspending.
A budget cadence, including rolling forecasts, exists to update budgets based on business drivers.
Teams and business units are responsible for managing their budgets based on forecast data and actual costs, usage, and impact.
Inputs and outputs
Inputs
Forecast models from stakeholders in all relevant areas.
Budget policy inputs from Management and Finance that define budget owners, Profit and Loss (P&L) owners, required budget levels, and other parameters.
Organizational P&L and cost center policies from the cost allocation capability.
Cost, impact, and usage report data from the reporting and analytics capability.
Outputs
A budget policy for all P&L owners and budget owners to use.
Budget allocations for all funded cloud systems, grouped by budget owner.
A budget adjustment process for out-of-cycle adjustments.
A reserve policy for all P&L owners and budget owners to use.
Budget reserves assigned to the corresponding budget owners.
Budgets assigned to P&L cost centers for the billing and chargeback capability.