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. It’s necessary.
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.
There are some rules of thumb floating around (like you should spend 3-6% of your annual budget on tech expenses). But every industry is different. Instead of giving general advice, 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.
Keep in mind that 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 nitty-gritty 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 refers to unnecessary tech spend that creeps into an organization over time. This can take the form of making redundant software purchases. It can also look like paying for subscriptions that go unused for months or even years, resulting in zombie spend.
While one or two of these won’t break the bank, shadow IT that goes unchecked can account for thousands of dollars down the drain.
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.
There are some IT budgeting processes that use a top-down approach. With these models, you use projections and percentages to come up with a dollar amount and then ask departments to adapt their behavior to that dollar amount.
A more efficient cost optimization model takes a bottom-up approach that allows current behavior to inform the budget. Rather than let generic guidelines dictate the budget, activity based budgeting looks for opportunities to streamline costs at a granular level.
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. You may choose to do some steps simultaneously or in a different order. As long as you cover each of the steps and customize them to your business, you can mold each to your individual process.
Step 1: Review past spend
Your past history is the best anchor for future plans. For this reason, having a detailed history of IT spend makes creating a budget easier. If this isn’t the case right now, make it a priority to have a centralized way to review your spending.
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
The next step is to discuss past spend with people who can give you insight into the “why’s” of spending and how they align with broader business goals.
You will want to understand 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.
Again, your specific plan will be unique to your business’s goals and priorities. But it can be useful to split predicted spend into at least 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 can optimize your IT budget and help you reduce costs
If the IT budgeting process feels overwhelming, it is likely because your organization does not have tools in place that give you the information and insights you need to confidently project future spending.
Ramp offers a centralized expense management system that not only gives you visibility into past spending, but also provides AI-assisted insights to cut down shadow IT and save money.
Make auditing a breeze with centralize spending data
Having spending data from all departments in your organization in one place cuts down on your research time. Instead of chasing down reports, Ramp keeps financial information organized with physical and digital corporate cards, as well as invoice matching and easy category labels.
When you begin to craft your IT budget, you’ll be able to access insights and understand spending trends through a single dashboard. This allows you to make informed budgeting decisions on where to allocate capital—and where to cut back.
Minimizes surprises with real-time reporting and notifications
Once your budget is set, you’ll be able to create automatic expense policies for each spending category and team. Spending limits can be set down to a daily level, so you can pre-approve expected expenses.
Spending that falls outside of the expense policy triggers are flagged so you can quickly review and stay up-to-date. If a policy requires multiple layers of approvals, everyone will be able to access the approval list. All of this minimizes back-and-forth and keeps you in the loop.
Get the best deals on IT software with procurement
When it comes to saving money, Ramp puts tools in your toolbox. We’ll negotiate your contracts for you and send alerts when a contract is above market price. Our savings experts will compare your contracts to thousands of customers and kick off a negotiation to get you the best deal.
Keep your stakeholders happy by staying under budget and opening up capital to pursue growth opportunities. Get Ramp for free.