Budgeting IT

Most companies have the misconception that IT is an expense, a cost centre. The truth cannot be further from that. Most companies rely heavily on IT for daily operations, and any downtime to the IT systems and infrastructure can be catastrophic and cripple operations, to say the least.

How much should a company allocate?

How much, then, should a company allocate for its IT needs each year? Every company will need to allocate its revenue from the previous year for different purposes for the upcoming year: Operations, HR, Marketing, Sales, Inventory, IT, R&D, Reserve, etc. Since every company is different, it is fair to assume that each has different budgeting needs. However, it is imperative to understand the business goals to determine the IT budget to allocate. In short, every IT budget needs to align itself with the business goals of the company.

Business goals can be broadly classified into two groups:

  • The maintenance needs of the company, and
  • The business growth plans in the next three, five and even 10 years. Once the business goals have been clearly defined, the next step is to find out how much is required to achieve them.

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Budgeting for maintenance and for growth

Budgeting for maintenance needs is straightforward, as costs such as wages, equipment, warranty, subscription and licences are already known. The tricky part is in budgeting for growth. There are many factors to be considered when budgeting for growth. Often, market research is needed to determine the required solutions, deployment timeline, and cost estimates to achieve the business growth objectives.As a rule of thumb, a company should allocate at least 1% of its revenue for IT budgeting. This should allow the company to keep its IT infrastructure sufficiently maintained and operational. Any less and the company risks having downtime in its IT systems and infrastructure. For example, if Company A generated revenues of $5 million in FY2014, it is recommended that it allocates $50,000 for IT spending for FY2015.

As a rule of thumb, a company should allocate at least 1% of its revenue for IT budgeting. This should allow the company to keep its IT infrastructure sufficiently maintained and operational. Any less and the company risks having downtime in its IT systems and infrastructure. For example, if Company A generated revenues of $5 million in FY2014, it is recommended that it allocates $50,000 for IT spending for FY2015.In 2013, Gartner published its IT Key Metrics Data summary report, which surveyed 2,688 companies and revealed that each company budgeted between 1% and 8.1% of its revenue for IT spending. This is in line with our recommendation of minimum 1% of revenue for IT budget. However, micro-businesses with turnover of less than $500,000 are recommended to allocate more than 1% of revenue for IT spending—the IT budget should at least cover the cost of a computer and essential IT services subscription, such as Internet and e-mail.

In 2013, Gartner published its IT Key Metrics Data summary report, which surveyed 2,688 companies and revealed that each company budgeted between 1% and 8.1% of its revenue for IT spending. This is in line with our recommendation of minimum 1% of revenue for IT budget. However, micro-businesses with turnover of less than $500,000 are recommended to allocate more than 1% of revenue for IT spending—the IT budget should at least cover the cost of a computer and essential IT services subscription, such as Internet and e-mail.

Seek advice from professionals

Having a guideline is a good starting point, but companies should seek expert advice from trusted or independent consultants to ensure that budget is allocated sufficiently for IT. Ultimately, technology should be deployed to support a company in achieving its business objectives. Technology is akin to a tradesman’s tool: an electrician should not skimp on an electric screwdriver and revert to a manual screwdriver just because it adds cost to him. Likewise, a company should not look only at the cost of deploying technology, but weigh that against the benefits of employing technology.

Technology, when applied appropriately, can increase a company’s efficiency and innovation, thus improving both its top and bottom lines.