IT Budgeting For Small Businesses: Importance & Doing It Right

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IT budgeting is a difficult, but very important task for any small business.

But unfortunately, for many of them, it’s a “we’ll cross that bridge when we get to it” thing.

That’s assuming they have a budget for their IT anyway.

In reality, IT budgeting is an essential mechanism for future-proofing your IT expenditure.

The key to achieving business success lies in effective IT budgeting and planning.

If you kept putting off your IT budget and you’re not sure where to start, you’ve come to the right place.

In this guide, we’re going to be focusing on information technology budgeting, IT expenses, best practices, and more.

Here’s what we’ll cover:

  • What is IT budgeting and why is it important? Most small businesses have a “we’ll cross that bridge when we get to it” attitude when it comes to their budget, here’s what to do instead.
  • What should your IT budget cover? Include these 7 main categories in your budget to make things easier.
  • Most small businesses spend around 2-7% of their annual revenue on IT-related costs. Here’s what to do if you have a limited IT budget. 
  • Where do you begin with your IT budget? Keep these 5 steps in mind to plan ahead
  • Should you hire or outsource IT? Do this right to save a lot of time and money as a small business

Are you a small business owner looking to get the most out of your IT budget?

Budgeting can be hard. From our experience, many small businesses get it wrong or just ignore it only to get hurt in the future.

Make sure your budget isn’t holding you back and you’re ready to scale with a tailor-made IT strategy that supports your business goals.

Sign up for a free, IT strategy consultation now!

What Is IT Budgeting And Why Is It Important? Where To Start If You’re A Small Business Owner

Investing in IT means investing in your business.

So, it’s important you get this step right.

But how do you budget for what you don’t know you might need?

Well, be sure to read on for a more detailed overview of budgeting.

Typically, when we walk into small businesses, it’s very common to see poorly handled IT budgeting, if there is any at all.

Not planning your IT budget will create a lot of problems for you down the road. 

So, you’ll need an IT roadmap to predict what you need to spend and what resources you might need in the future.

But many businesses just avoid the topic altogether.

According to a 2021 study, just 54% of small businesses have an official budget

That means half of all small businesses are working without a framework to evaluate their performance or budgeting plans for their future.

To keep things simple, when working with small businesses and their budgets, we typically start with their equipment and software buy cycle

We first try to figure out what they do and what they’re accustomed to doing.

Most small businesses don’t look into the details and get surprised when they’re caught with a big invoice for software renewal.

One obvious example of this is that if buy your software with an annual subscription, instead of a month-to-month renewal service, you typically get 2 months of free usage. Though, this depends on the specific software.
Here’s an example of Shopify pricing. If you’re an eCommerce business, you can choose to pay yearly and save 25% of your budget. In addition to paying just $1 for the first 3 months.

IT Budgeting For Small Businesses: Importance & Doing It Right - Shopping Prices

This could be the difference between paying $4,788 for the year versus month-by-month versus paying $3,588 upfront. $1,200 is a considerable saving here.

Especially as a small business when you want to get the most out of your IT budget.

Why does your IT budgeting matter? 

So, why does all this matter?

Look at your IT like your car.

You use it daily to get to work.

But over time, it starts to slow down, you pay maintenance costs, and it’s taking you longer and longer to accomplish what you use it for (in this case, getting to work).

Over time, you have to ask yourself: Is the opportunity cost for keeping and maintaining that car worth it?

After all, you’re investing time and money, only for it to slow down and be less effective.

If it took you 30 minutes to get to work, it’s taking you over an hour now.

Those maintenance, warranty, and renewal costs start to add up. When you should also be considering getting new hardware (in this example, a new car).

Your IT and business hardware are the same way.

Additionally, if you’re using obsolete or unsupported software or operating systems within your IT infrastructure (e.g. Windows 7 as of 2023), you risk:

  • System downtime and crashes.
  • Rising costs.
  • Lower productivity.
  • Security gaps.
  • Risking failure to meet potential laws and regulations.

According to Kaspersky, 48% of small, and medium-sized businesses and enterprises still rely on unsupported or nearly expired operating systems for their security needs.

As of January 14, 2023, Microsoft has stopped supporting Windows 7 and Windows 8.1.

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Meaning, businesses that still use them risk potential security gaps in their business.

This is another very important aspect within IT budgeting you should consider – when to quit supporting old systems and buy new.

What should your IT budget cover? 7 Main budget categories overview

It’s also very important to consider your requirements and current IT infrastructure.

We’ve seen businesses paying for internet speed that their firewall couldn’t support. So, essentially, they were just overpaying for their internet.

So, that was a very straightforward and fast decision to cut costs.

Of course, it’s also important to know what signs to look for when approaching your IT budget.

Many business owners aren’t as proficient in the technical side of things, which is where we come in.

Some businesses we work with are often surprised with how much they spend on their own IT.

Now, that number will vary industry-to-industry business-to-business.

But generally speaking, according to a report by Deloitte, both small and large businesses spend around 2-7% of their annual revenue on IT-related costs. Though, it also heavily depends on the specific industry. 

While the IT budget average for all industries is around 3.28%

To get a better overview of the budget, we use budgeting software that puts all the costs and data together in one place to start.

Then, we typically categorize different areas of the budget accordingly.

For example, your asset list, renewal costs, license costs, hardware costs, and more.

Then, you also have to consider the specific, contextual situations.

For example, should you renew the warranty on your laptop or buy a new one?

Again, it depends.

If it’s a three-year-old $1,000 laptop, and you have to spend around $300 to renew it, chances are, it might make more sense to buy a new laptop altogether in one year or so.

Meanwhile, if it’s a more expensive laptop for your technical needs, then you might want to renew it.

So, to recap, the process is usually:

  • Define priorities.
  • Organize everything related to the IT budget in one place.
  • Categorize different costs and expenses.

Then, the 7 most common information technology budget categories we find in most businesses include:

  • Hardware.
  • Software.
  • Support and maintenance.
  • Backup and contingency costs.
  • IT department costs.
  • Project costs.
  • Miscellaneous.

Let’s take a look at where to go from here now.

Getting The Most From A Limited IT Budget (When To Replace Tech)

Technology is at the forefront of all businesses.

Some people want to get the most out of every tech and hardware they buy, which might make sense at first.

If you spend money on something, you’ll want to gain the most value out of it, right?

But if you look at it from a business perspective, that is actually not the case.

Once your hardware slows down, it takes a toll on your operational efficiency and overall business success.

For example, let’s say you’ve got up to 100 employees and your computers are starting to show signs of wear.

If it takes a computer up to 15 minutes to reboot and that happens 3 times a week, how much does that cost you over time as it adds up?

Many business owners don’t see the opportunity cost behind this.

With new hardware, you directly see a boost in efficiency, and as a result, in employee productivity and business metrics.

It’s a win-win for everyone.

There’s a common mindset of “If it’s not broken, why fix it?” among business owners.

But when technology is running your whole business, these things matter.

The same applies to your software, which can also be one of your biggest expenses. Because, as you scale and hire more employees, you’ll typically be paying more per employee seat on the software.

To help small businesses, we create and introduce recommendation road maps based on the IT budget. In it, we include recommendations, not requirements.

There are things you might not necessarily have to replace, but you might want to replace them so you don’t use them to the point of failure.