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Key Aspects of Planning in IT Companies: Revenue, Labor Costs, and Overhead Allocation

by | Jul 1, 2025 | Blog | 0 comments

In the IT industry, effective budgeting isn’t just about setting global revenue and expense targets. To manage finances accurately, it’s crucial to address project-specific factors like diverse service offerings, labor costs tied to specific initiatives, and properly allocating indirect expenses (overheads). Let’s break down why planning revenue by service type, linking labor costs to projects, and managing overheads intentionally is so important.

1. Revenue Planning by Service Type

Revenue in IT companies is rarely a one-size-fits-all figure. It typically comes from a variety of sources, such as:  
    • SaaS solutions
      (e.g., cloud platforms, analytics tools),
    • Consulting and implementation services,
    • Custom software development projects,
    • Licensed proprietary products.
    Each of these areas has its own sales cycle, profit margin, and seasonality. Breaking down revenue by category (e.g., SaaS subscriptions vs. custom software development) allows companies to:  
      1. Identify which business lines are most profitable and which ones are underperforming.
      2. Tailor marketing and sales strategies to fit the specific characteristics of each segment.
      3. Forecast cash flows more accurately based on the payment models of each service (e.g., upfront payments for subscriptions vs. milestone-based payments for implementation projects).

    If revenue is treated as a single, undivided amount, it can distort the company’s true financial picture. Instead of making strategic decisions, resources might be allocated inefficiently—for example, overinvesting in less profitable areas while neglecting high-potential ones.

    2. Labor Costs by Project


    In the IT industry, employment-related expenses (salaries, benefits, bonuses) often represent the largest share of the budget. Here’s how to manage them effectively:

       
        1. Budgeting Per Project
          2. Clearly define how many hours (or full-time equivalents) each initiative will require. For consulting firms or software houses, accurate time tracking can determine whether a project is profitable. Timesheet systems are a good practice, allowing companies to monitor actual workload and associated costs in real time.
        2. Internal Billing Rates
          3. For externally-facing projects, assigning an internal billing rate to each employee can be extremely helpful. This makes it easy to calculate the total labor cost for a project and assess profitability on an hourly basis.
        3. Training and Development Costs
          4. In IT, skills development (e.g., training and certifications) isn’t optional; it’s a necessity. These costs should be built into budgets at both the departmental and project levels. This also helps companies plan hiring schedules and ensure specialists are available when needed.
      With such a detailed approach, companies gain a clear view of which projects deliver a solid ROI and which may need restructuring, scaling back, or removal from the portfolio altogether.

      3. Managing Overheads (Indirect Costs)

      Overheads in IT companies typically include:
          • Administrative costs (e.g., HR, accounting),
          • Office maintenance or general work tools (e.g., licenses, subscriptions),
          • Management costs,
          • Marketing and PR expenses (if not tied to specific products or campaigns).
        How can these costs be fairly distributed across projects and departments? It’s a critical question for:
           
            1. Accurate Project Profitability
              2. When overheads are poorly allocated, apparent “profits” from a project may disappear once the true costs of running the business are included.
            2. Fair Cost Distribution Between Departments
              3. Different departments (e.g., R&D, sales) use shared resources like back-office support at varying levels. Using allocation keys—such as percentage of revenue, number of employees, or hours worked—helps ensure costs are fairly distributed. This avoids situations where one department is unfairly burdened with expenses.
            3. Better Investment Decisions
              4. When companies know the full cost of their projects (including overheads), they can better evaluate which ones generate the most value. For example, a product that looks highly profitable on paper might, in reality, have significant support costs that drastically reduce its margin.
          Common methods of overhead allocation include basing costs on the number of employees in a project or department, total hours worked, or percentage of overall revenue. Whatever the method, it’s important to define these rules collaboratively with project leaders, management, and the finance team.

          Why Does This Matter?

             
              1. Financial Transparency
                2. Precise revenue and cost breakdowns, including overheads, eliminate guesswork from decision-making. Companies get access to real data that drives better project, priority, and resource management.
              2. Strategic Planning
                3. This approach helps businesses identify which services or products have the greatest growth potential (e.g., high margins and market demand) and which areas need restructuring or additional investment.
              3. Investor Confidence
                4. Detailed financial analyses and clear data on project profitability build investor trust and improve the chances of securing favorable funding.
              4. Risk Management
                5. Understanding how costs (including overheads) are distributed across projects makes it easier to anticipate and mitigate risks, such as the impact of losing a key client.

            Conclusion

              For IT companies operating in a competitive market, detailed revenue planning, linking labor costs to specific projects, and careful overhead management are essential. These practices enable smarter investment decisions, support long-term strategic growth, and help maintain healthy profit margins. Additionally, they foster better collaboration across departments and improve transparency, ultimately leading to sustainable company growth and a more satisfied team.