Have you drafted your company’s IT budget for 2023? If you haven’t yet, it’s about time you did. Given tech’s role in the modern business world, IT budgeting has become a crucial facet of financial management and overall business planning. Besides, business technology is not exactly cheap. If poorly planned, your IT investments and ventures can turn into a cash drain and a heavy drag on the operations, logistics, and efficiency of the entire organization.
According to Flexera’s 2022 Tech Spend Pulse, organizations spend, on average, 8% of their revenue on IT. So, depending on the organization, the total IT spend can range from thousands to millions of dollars. Seventy-seven percent of the surveyed CIOs and IT executives said their companies allocate over $25 million annually to IT. What’s more, a majority of respondents expected their IT budget to increase.
But don’t let these figures get to your head. There’s more to budgeting than simply putting a price on IT. On top of that, every company has a unique IT infrastructure with goals and objectives that align with the underlying mission or business plan. And that’s exactly what this guide is about — developing an IT budget that suits your business model and digitization goals. Read on and learn a thing or two about creating a successful IT budget in an increasingly tech-reliant world.
Why is IT budgeting so important?
For many organizations, IT is the backbone for several mission-critical initiatives, including day-to-day operations, customer and employee engagements, commercial transactions, business management, product/service delivery, marketing, and communications. As such, IT budgeting, which is a big part of IT planning, can very well determine the success of the enterprise as a whole. After all, IT efficiency is tightly intertwined with overall business performance.
More specifically, making an annual IT budget is important for the following reasons:
- Controls and tracks IT expenses
- Informs the allocation and prioritization of IT funds
- Helps measure the value of IT investments in terms of ROI
- Reveals ways to optimize and cut IT costs
- Ensures you’re making optimal and efficient use of your tech resources
- Helps schedule systems maintenance, updates, and upgrades
- Provides insights into IT road mapping by highlighting potential constraints and gains
- Helps establish and justify IT spend boundaries
- Streamlines bookkeeping
- Empowers digitization
A step-by-step guide to IT budgeting
There’s an old saying, “Failing to plan is planning to fail.” It’s a bit cliché but couldn’t be truer in the context of IT budgeting. Remember, there’s more to IT budgeting than just running the numbers. Although there’s a fair amount of math in budgeting, it also involves several important variables and considerations that won’t fit onto a spreadsheet. What you need is a strategic plan that brings all the puzzle pieces together in an organized manner to create the complete picture. Here are eight steps to doing just that:
Step 1: Review past budgets
It’s always good practice to review and audit earlier budgets before creating a new one. The idea is not to copy what you did last year or the year before but to improve on it. You can learn a lot from past budgets. For instance, you can identify and borrow some of the ideas that worked in the previous budget and avoid or modify those that didn’t. Plus, you get a solid template on which to base the new budget.
Keep in mind that while IT budgeting may be a yearly thing, IT funding is a continuous process. Some funding decisions for 2023 may still depend on tech allocations, spending, and outcomes from previous years. This is another good reason why you should look back before going forward.
Step 2: Set your budget goals
It’s important to set some realistic goals for your IT budget to serve as guardrails for the budgeting process. Crucially, these should align perfectly with your digitization plans and the foreseeable IT requirements for the year. For starters, the budget has to have a limit equal to or below the total sum of money you’ve set aside for IT spending. Setting a realistic budget limit instills a level of financial discipline and ensures the IT expenditure stays well within the company’s abilities.
Another common goal in IT budgeting is cutting unnecessary costs. This often means eliminating redundancies in IT processes, adopting cheaper alternatives to otherwise costly systems/processes, or completely doing away with unproductive or overly expensive items.
Step 3: Identify key spending categories
The next step is to get the scope of your new IT budget based on its goals. Which areas of the IT department or the company will the new budget touch? The answers to this question should give you a broad overview of your IT spend distribution. These categories may vary from budget to budget, but they usually consist of:
- Hardware and software resources
- Cybersecurity, IT governance, and compliance
- Hosted/cloud-based services
- Systems upkeep, support, and maintenance
- Software/web development
- Digital transformation initiatives
- User management
Step 4: Tally your IT expenses
At this stage, you’ll need to take an in-depth audit of the budget categories you identified in “Step 3” to create a list of direct expenses. Determine exactly what you’ll spend the money on and how much it’ll cost. Every single IT expense for the year goes on this list, whether it’s hiring new workers, buying new hardware, or servicing software licenses.
Next, assign a priority value to each expense based on its urgency and importance. Obviously, some IT investments or bills will be weightier than others. For instance, paying for cybersecurity services outranks replacing an old office printer. A priority list ensures that all the crucial expenses are catered to first, just in case the budget needs trimming later on or funds become limited.
Step 5: Get team buy-in
The budget is almost done by now; you just need to iron out any kinks. We’ve mentioned that the IT budget touches nearly every aspect of the organization. So, it’s only fair to run the proposed budgetary plans by the various departments it affects. Explain to your staff the reasoning behind any drastic or controversial decisions and encourage constructive feedback.
You might have to go back to the drawing board several times to address any reasonable pushback or suggestions. But it won’t be a waste of time. Employee involvement in budgeting brings everyone on the same page and reduces friction during implementation.
Step 6: Run a final check
By now, the budget may have gone through a couple of iterations. Give it one last look to make sure it has not veered too far from the original goals and constraints. Then prepare it for the implementation phase if everything checks out.
Step 7: Start implementing
Implementing an IT budget is just a matter of mobilizing the financial team to start allocating and channeling funds to the various entries in the budget. This is where the priority list comes in handy. The company may not have all the money needed to service the entire IT budget in one go. So, the items with higher priorities will be handled first while the rest get funded as cash becomes available throughout the year.
Step 8: Track the budget
Once the budget starts rolling out, it’s essential to ensure it stays on course through monthly or quarterly check-ins. Tracking the budget also allows you to adjust the IT spending along the way while taking reference notes for the next budget.
Bonus tips for IT budgeting
In closing, here are some more considerations you should keep in mind when developing an IT budget for the coming year:
- Allow for some level of flexibility in the budget to absorb financial fluctuations in the business and changes in technology trends.
- Reserve an emergency fund dedicated to IT disaster recovery.
- Set a consistent IT budgeting cycle (ideally annually).
- Keep your sights on the long-term IT and business goals while preparing the annual budgets.
- Assign budgetary roles to department or team leaders to speed up expense discovery and streamline employee involvement.
- Keep tabs on each budget’s outcomes to determine your IT’s ROI over time.
- Do not overreach with your IT allocation or underestimate your IT needs.
- Prioritize cost reduction and optimization in every IT budget.
Optimize your IT spending with WeDevelop
WeDevelop is an IT staffing and development outsourcing agency. We enable US-based companies to utilize highly skilled IT talent from Latin America through a quick, convenient, and affordable arrangement. The LATAM region is currently the hottest nearshoring destination for US employers. And besides being just a stone’s throw away from home, LATAM countries such as Argentina, Mexico, and Colombia are teeming with world-class tech experts, software developers, systems engineers, and UI designers.
We understand that one of the main reasons for budgeting IT is to get a good handle on IT expenditure, more specifically, to lower costs and maximize ROI.
IT labor and software/web development are two needlessly expensive entries that WeDevelop can help you trim in your next budget. Payroll alone can take up as much as 70% of your operating capital. But with our cost-saving staff augmentation, dedicated teams, and project outsourcing solutions, you can instantly cut expensive hires and development labor off your 2023 IT budget.
Start optimizing your IT budget today with WeDevelop. Schedule a free, zero-obligation call with our team to get started.