How to Calculate a Relevant IT Budget
There’s no doubt, calculating your IT budget is difficult. And in this modern age, there’s a lot that goes into it. And while many companies view IT budgeting as something to minimize, our view is different. We believe any IT budget should work to support your organizational goals and help you grow. In essence, that’s what IT can do.
Before going into the numbers and details of calculating a relevant IT budget, let’s recap and explain what an IT budget is and why it’s important for businesses to have one.
What is an IT budget?
Budgeting for your IT is allocating money for all the different parts surrounding your IT infrastructure and applications. It can involve all types of equipment leases, from workstations, servers, and printers to staffing, software licenses, and more. Depending on your approach, budgeting can be something you do annually, quarterly, or something you view when a new project or need arises.
Why is an IT budget important?
IT budgeting nowadays is very important. Perhaps more than ever. Businesses worldwide depend on working IT and innovative IT projects to improve operational efficiency and increase productivity. Technology can also help improve the happiness of your employees. Knowing what funding you have to keep IT running, improving, and helping you achieve your business goals is vital for all modern companies.
Now, let’s give you some practical tips on how to calculate a relevant IT budget for your business.
Using IT Spending Ratios
What’s a reasonable IT spending ratio?
First, the term ‘reasonable’ is better replaced with the word ‘relevant’. When talking about IT budgeting and spending ratios as ‘relevant’, it reinforces the idea that IT is important and directly correlated with business success, rather than IT as an expense or something to minimize.
IT budgets fall into three broad categories:
Operational: Meaning, monitoring, managing, and supporting the status quo.
Improvement: Budgeting for improvements means investing in replacements and upgrades, which changes the status quo and moves the seven business and IT assessment categories from red to yellow to green status - or maintaining a green status.
Incremental: An incremental budget is for any business expansion or major change that goes beyond the status quo. This can involve capital investment as well as an expansion of the operational budget.
A common way for businesses to budget IT is by a percentage of revenue. While the overall average for all industries is 3.28%, according to Deloitte, they report the following IT budget percentages by revenue and industry:
Banking and securities: 7.16%
Business and professional services: 5.82%
Education and nonprofits: 5.77%
Travel, media, and hospitality: 4.39%
Technology and telecommunication: 3.73%
The lowest percentages on the list are consumer business and retail, manufacturing, and construction at 2% and below.
But rather than focusing only on percentages and dollars, focus on the alignment and relevance to your business. If an IT initiative moves you closer to your desired business goals, whether operational, cultural or in terms of revenue, budget accordingly.
Key Aspects to Consider When Calculating IT Budgets
When calculating your IT budgets, there are a few important aspects to consider. As you can understand, the budget elements can vary depending on the budget category involved. It also depends on the level of complexity and your departmental structure.
But at a basic level, you can structure your IT budget like this:
1. Operational Budget
This budget is variable and dynamic in design and focuses on a per-unit expense.
It is assessed to each of the following elements:
Users
Workstations
Client/Server/Site
Network
Software
2. Improvement Budget
Your business and IT roadmap drives this budget and focuses on maintaining and improving the status quo’s maturity. This can involve capital investments and project-related expenses to improve/optimize the use of existing infrastructures and tools.
3. Incremental Budget
Your business and IT roadmap also drives this budget and focuses on business expansion or radical change. It can involve capital investment as well as Operational Budget changes.
When calculating IT budgets, a key part is making sure everyone understands why and how. Communicate it well and make sure employees and executives understand its purpose so it can get approved with minimal back-and-forths.
IT impacts a business in all areas. Therefore, put enough time into planning a strategy that everyone can support. The financial part is merely the driver behind the strategy - so make sure it’s great.
Avoid these common errors when calculating your IT Budget
When calculating your IT budgets, you want to avoid errors at all costs. If initiatives suddenly cost more than planned for or don’t support your business objectives, it’s not pretty.
Common mistakes include not proactively and consistently managing your workforce and their IT needs, especially IT infrastructures (workstations and peripheral equipment). Maintain and keep an accurate assessment and inventory of your IT assets.
Another mistake is not accounting for the capacity of your infrastructure especially network infrastructures and application supportability and refresh. Aging hardware and software might need replacement, further integrations, or additional improvements, which can change your IT budget.
A third common mistake is not accounting for cyber security, starting with policies and risk assessment followed by regular investment into related infrastructure and applications. Your security is key and especially important to account for when calculating budgets.
Simplify your IT budgeting
Like other areas of the business, not accounting for important areas or forgetting to include costs when doing new initiatives can have detrimental financial effects. Behind any great IT budget is careful planning and attention to detail. And behind IT budgets that support your most important business goals is structure.
By working with a technology partner who knows how to use technology to drive ROI and measurable results, IT budgeting becomes much easier.
Interested in learning more? Contact us today.