Budget season can feel overwhelming, especially if you’re an engineering leader navigating competing demands from finance, product, and your own team. With that in mind, let’s dive into what budget planning is, what it isn’t, how you should prepare, and common pitfalls to avoid.

What Is Budget Planning?

Budget planning, or annual operating planning, involves building your organization’s business and financial plan for the upcoming year. It answers questions like:

• How much money do we expect to generate and spend?
• How many customers will we have, and how will we attract and retain them?
• What resources do engineering and other departments need to meet company objectives?

What Budget Planning Isn’t

To avoid confusion, let’s briefly distinguish budget planning from two related but separate processes:

• Roadmap Planning (Product Planning): This focuses on defining what the engineering team will build over the next year. Sometimes, the roadmap informs the budget by clarifying resource needs; other times, the budget influences what can realistically make it onto the roadmap.
• Employee Reviews and Compensation: While this impacts your budget indirectly (retaining talent costs money), it typically runs as a separate process. Nevertheless, major promotions or salary adjustments should be accounted for in your budgeting process.

Budget planning is inherently iterative. You’ll adjust your plan based on shifting priorities and input from finance, sales, marketing, and executives. Eventually, you’ll finalize a plan that guides hiring and strategic decisions for the upcoming year.

How Should You Prepare?

Whether you’re leading the entire engineering budget or managing a smaller portion, here’s how to get ready:

1. Review and Estimate Key Areas

• People: Understand your current team composition and identify any additional roles you’ll need.
• Projects: Know what your team is currently working on and what has been promised or planned but not yet resourced.
• Costs: Calculate your expected expenses—people are usually the bulk, but don’t forget recruiting fees, cloud infrastructure, developer tools, and other technology costs.

2. Be Ready for Negotiations

Expect challenging conversations and prepare answers for common pushbacks:

• “Why can’t your existing team handle more?”
• “Can we reduce costs by using offshore resources?”
• “What would you cut if you had to operate with 80% of your proposed budget?”

Common Mistakes Engineering Leaders Make (and How to Avoid Them)

Budget planning can be stressful, but recognizing these common pitfalls can help you avoid them:

Mistake #1: Avoiding or Resenting the Process

Budget planning isn’t fun for most technical leaders. However, embracing it positions you to best advocate for your team and resources. The business relies on your input—so engage proactively.

Mistake #2: Overlooking Fixed Costs

Engineering teams often spend more than half of their capacity on ongoing support and maintenance. Ensure these fixed costs are clearly understood and included. Accurate historical data significantly strengthens your position in negotiations.

Mistake #3: Ignoring Historical Context

Learn from past budget cycles. Review prior assumptions, identify where things went off track, and communicate clearly how your new plan addresses past mistakes. This adds credibility and builds trust across the organization.

Mistake #4: Underestimating Hiring and Ramp-Up Costs

Hiring is costly and time-consuming, and new team members won’t reach peak productivity immediately. Ensure you factor onboarding and ramp-up periods into your budgeting assumptions. Leveraging historical data helps make realistic projections.

Mistake #5: Dismissing or Avoiding Estimates

Engineers often resist estimating work because it’s inherently uncertain. However, estimates grounded in historical data can guide productive conversations. If engineering avoids providing these estimates, someone else (usually finance) will do it for you—and that rarely ends well.

Mistake #6: Focusing Too Much on Estimates

While accurate estimates matter, obsessing over precise numbers can become counterproductive. If you’re pressured to reduce estimates, don’t immediately comply without addressing the broader context and risks involved. Estimates are one piece of a bigger picture—not the only focus.

Final Thoughts

Though annual planning might seem tedious, it’s crucial to your team’s success next year. Your insights and leadership can make the difference between realistic, achievable goals and frustrating shortfalls. Engage proactively, leverage your data, learn from the past, and advocate effectively. If you don’t lead these conversations, rest assured someone else will—and probably without the insights your experience provides.