Keep your IT spending under control with these IT budgeting best practices

We’re at the point in the digital transformation where almost every industry relies on IT to keep running. In that light, having an IT budget is no longer optional.

As more and more solutions become digitized, we expect IT budgets to increase. In Q1 of 2022, we’ve seen a 17% increase in software spending on Ramp cards compared to last quarter.

While tech spend is necessary, having a process for IT budgeting keeps your costs under control. Some experts might suggest that companies should reserve up to six percent of their annual budgets for tech-related expenses, but every organization has unique needs. This article will give you steps to create an IT budget unique to your business.

‍What is an IT budget?

An IT budget is the part of your budget that covers technology-related expenses. This ranges from an operating budget, which involves day-to-day expenses, all the way to capital expenditure for individual projects or campaigns.

Effective IT budget management considers anything that is tied to the technology your business uses. This means that items like IT payroll, conferences and certifications also fall under the IT budget.

Here is a non-exhaustive list of expenses to consider as you look at your IT spending:

• Software: Licenses and subscriptions for programs
• Hardware: Laptops, servers, and smaller items like USB drives and headphones
• Payroll: Payment for IT professionals that keep systems running
• External consultants: For ramping up projects or troubleshooting issues
• Cloud and data: Also consider security measurements to keep data safe
• Knowledge gathering: Conferences, trainings and certifications for IT professionals

IT budgets involve more than you may initially consider. The first step will be to develop categories that make sense for your business. We’ll get to the details of this approach below.

Who is involved in creating an IT budget?

In the past, IT spend was more centralized and the budget often fell on the CIO. Now, almost every department has tech they need or desire.

Because of this, it is becoming more common for heads of departments to develop their own IT budget with input from the CIO or technology department. For this reason, it’s important that whoever is in charge of managing the IT budgeting process has visibility into spending patterns in every department.

Regardless of the title of the person managing the IT budget, it’s pivotal to align spending with the CEO and CPO. At the end of the day, technology spend should support the goals and needs of the business.

The importance of planning & preparing for your IT budget

Many businesses take a reactive approach to IT budgets. Spending is only considered when replacing a failed piece of hardware or acquiring a new software license.

This might not seem like a big deal as long as there is capital to cover the spend. But neglecting to plan an IT budget can erode profits due to a phenomenon called shadow IT.

Shadow IT is a term that describes how easily employees can acquire new software without IT’s approval. In many cases, this leads to redundant software purchases and subscriptions that go unused for years. In a short window, the costs of unnecessary SaaS spend can have a huge impact on your IT budget.

Auditing your tech spend and creating a budget with set categories helps curb unnecessary spending. The money you save can be used for expansion projects or other company needs.

How to create a cost-effective IT budget

Because technology spend happens across departments, IT cost optimization is increasingly complex. Having a process for auditing and managing your spend helps you gain visibility and control over your business finances.

A cost optimization model takes a bottom-up approach that allows current behavior to inform the budget. IT teams that want to streamline costs at a more granular level tend to use an activity based budgeting model.

This allows you to build a budget that reflects the realities of how your teams spend and what they value. This aids execution by making individual contributors feel that the budget is in touch with what is happening on the ground.

Budget building can be split into four steps:‍

Step 1: Review past spend

Your past history is the best anchor for future plans. You can review your IT spend by year, by quarter, for the company overall and by department. The details of how you look at spending depends on your role and responsibilities.

Step 2: Talk to stakeholders and managers

You should have a deep understanding of how managers decide what is worth spending on and how stakeholders want you to prioritize budgets. You’ll also want to have conversations about plans for the year so that you can include upcoming projects in your budget.

If you have a finance department, make sure they are on your list. They will be able to give you a high-level overview of the company-wide budget so that you have context for how realistic your budget is and how it impacts overall finances.

Step 3: Understand necessary recurring expenses

Good financial planning and tracking helps you avoid surprises. Reviewing spend and recurring expenses, and aligning with stakeholders allows your organization to set money aside to cover expenses.

While expansion projects are good for growth, you’ll want to pay special attention to operational expenses that “keep the lights on.” Most businesses can survive without expanding, but you don’t want to be backed into a corner that keeps you from completing revenue-generating activities.

Step 4: Plan for the future

After you have a good hold on what current expenses look like, start creating a plan for the future. This is where you can propose plans to sunset IT that is not being used or consolidate software licenses that serve the same purpose.

Your initial research from the first three steps will inform the future budget. You should also do some predictive work by understanding when software licenses need to be renewed, when hardware warranties expire and the details of these agreements. Other items can include hardware replacements and upgrades.

Many IT organizations find it useful to split predicted spend into three categories: operating expenses, planned initiatives, and wish list.

Operating expenses (opex) include day-to-day IT spend that is essential for the functioning of the business. Planned initiatives (sometimes referred to as capex) are investments in new projects or upgrades to expand business. Finally, a wish list includes items that are “nice-to-haves” that may improve employee morale or effectiveness, but are not necessary items for the foreseeable future.

It’s also wise to leave some wiggle room by overestimating your budget. This can be done by adding 10-25% to the budget for discretionary spending. You can also add items to the wish list that can be cut back if the budget needs to be reallocated to necessary items.

How Ramp helps you take control of IT spending through smarter budgeting

IT spending can spiral out of control faster than you can say "software subscription." Between SaaS sprawl, duplicate licenses, and shadow IT purchases, finance teams often discover they're paying for tools no one's using or multiple subscriptions for the same service. Making matters worse, IT expenses are notoriously difficult to track since they're scattered across different departments, vendors, and payment methods.

Ramp's expense management platform tackles these challenges head-on with automated spend controls and real-time visibility. When you issue Ramp cards with specific spending limits and merchant restrictions, you can ensure IT purchases stay within budget before the transaction even happens. Set up virtual cards for each software vendor with exact monthly limits that match your subscription costs—no more surprise overages or accidental upgrades. You can even create department-specific cards that only work with approved IT vendors, effectively eliminating unauthorized software purchases.

The platform's real-time expense tracking gives you instant visibility into where your IT dollars are going. Instead of waiting until month-end to discover budget overruns, you'll see every transaction as it happens, complete with automated categorization and receipt matching. Ramp's duplicate detection automatically flags when multiple teams are paying for similar services, helping you consolidate subscriptions and eliminate redundant spending. The system also sends alerts when spending approaches budget limits, giving you time to course-correct before going over.

By combining proactive spend controls with comprehensive visibility, Ramp transforms IT budgeting from a reactive scramble into a proactive strategy. You'll know exactly what you're spending, why you're spending it, and have the tools to ensure every IT dollar delivers value to your organization.

Optimize your IT budget

Beyond spend controls, Ramp's AI-powered insights help you make smarter purchasing decisions. The platform's vendor management features centralize all your contracts and renewal dates in one place, sending you notifications 30 and 60 days before renewals so you never get caught off guard.

When it's time to buy new software or renegotiate contracts, Ramp Price Intelligence gives you the upper hand. Drawing on data from millions of anonymized transactions, you can see what similar companies pay for the same tools. Armed with these benchmarks, you'll negotiate from a position of strength and ensure you're getting competitive rates.

The result? You'll free up budget for growth initiatives while keeping your stakeholders happy. Learn more about how Ramp Intelligence can help reduce your IT spend.