In order to increase your bottom line, you need to know exactly where you spend your money. Businesses should budget 3–7% of their annual revenue on technology expenses. If you are in an industry that is less technology-dependent (e.g., construction, landscaping, dog groomer, etc.), you will be closer to the 3% end of that range. If your business leans heavily on technology (e.g., banking, medical, manufacturing, etc.), you should be closer to 7%. Calculating the annual budget is pretty straightforward and simple. Allocating that budget is a little more complicated and depends on how you strategically use technology.
Businesses should budget 3–7% of their annual revenue on technology expenses.
Your technology budget should be broken up into three categories: Management, Security, and Research and Development (R&D).
Management
This part of your budget is what you use to keep your current systems running smoothly. This will include upgrading aging equipment and renewing software licenses and service agreements (e.g., internet, phones, IT vendor, etc.). You’ll also use these funds to account for technology failures and disruptive events. Without a doubt, this will be the bulk of your budget (75–90% depending on your business).
BONUS TIP: All of your hardware should be on a replacement life cycle. If you want to avoid unexpected hardware costs, set your refresh cycle to coincide with the end of the warranty. For example, if you don’t purchase extended warranties, your computers will be on a three-year refresh cycle.
Security
Security has been a growing budget item over the years. It used to be that the only technology risk you had to worry about was a system crash or natural disaster. But now, cybercrime has grown to be a 1.5-trillion-dollar industry on the backs of small businesses. To combat this, you need to do an annual risk assessment and penetration test to determine your vulnerabilities. From there, prioritize these vulnerabilities based on the likelihood of exposure and the severity of the impact it would have on your business. At that point, you try to address the vulnerabilities that pose the greatest risk to your business. This line item comes down to how well you want to sleep at night, but typically businesses allocate 10–20% of their technology budget on security.
R&D
If you’re serious about utilizing technology to create a strategic advantage in the market space for your business, you’d better allocate some money to researching and testing new solutions. Every new idea or product initiative requires research and testing. This line item will cover those expenses (0–5%).
You should implement this formula into your business immediately if you don’t currently have a way to manage your technology expenses. Experiment with the percentages to see what makes the most sense for your business. How you allocate the budget is completely up to you, though it is cautioned not to stray too far outside the ranges listed. Otherwise, you might find yourself in a situation where you don’t have enough money budgeted to meet your needs.
Once you’ve established your budget, refer to it when you create your Technology Roadmap. This will help you to plan your technology expenses quarter by quarter for the entire year. At the end of each quarter, you should evaluate whether the technology projects you had planned cost more or less than the amount you allocated. Reviewing your budget along with your Technology Roadmap at the end of each quarter will not only prevent your technology costs from getting out of hand but will also show you whether you’re setting accurate budgets. If you find that you consistently go over or under the budget, reevaluate the annual budget and the allocations that you have set.
If you’d like help creating your own Technology Roadmap, or consulting on your budget, strategic outlay, or other needs, Simple Plan IT is available to help.
