How To Develop and Plan Your IT Budget

Here's how to create an IT budget that aligns with your business goals and optimizes your ROI.

As a small to midsize business leader, you’re probably already thinking about how to allocate the annual budget for 2024, dividing funds between marketing, operations, sales, logistics, IT, and more. IT is one of the most critical and vital functions of a modern small business, improving operational efficiency, performance, and more. For many small to midsize businesses, a specified IT budget gives them room to scale operations, enhance cybersecurity, and dedicate resources to innovation. Let’s discuss how to develop an IT budget, how to track and manage it, and how to ensure it fits within your company’s overall financial goals.

What is an IT budget?

An IT budget sets aside company finances for hardware, software, applications, outsourcing, internal team members, cloud services, data storage, and any other cost incurred by your information technology department. As a defined plan that guides your IT spending, an IT budget is important for staying on budget and not exceeding costs.

As a small business leader, it should also make you feel confident that you have money set aside for critical resources such as cybersecurity, cloud applications, emerging technologies, or anything else that will help your business grow and remain competitive. An IT budget helps you accurately forecast spending and cash flow and provides the necessary funds to keep your IT operations running.

Why is IT budgeting important?

IT costs can quickly add up, and it’s often one of the bigger portions of a company’s financial budget. Not only is IT an expensive function, but inadequate planning can lead to significant surprise costs. A budget also ensures you have the right tools and people in place at the right time to meet seasonal demands, unexpected incidents, and more.

A well-executed IT budget also allows you to prioritize the most important initiatives that will get the largest return on investment (ROI). When you can track the costs associated with a project and the potential returns, you can quickly identify which departments and initiatives generate the most income for your business. Take a look at some of the reasons why an IT budget is important:

• Proper cash flow and financial planning

• Financial stability

• Allows for emergencies and unforeseen costs

• Controls IT spending

• Creates viability and transparency in IT costs with leadership

How to plan your IT budget

As per Capterra’s 2023 Data Security Survey*, 70% of IT security managers said their organization’s IT security spending increased from 2022 to 2023, and costs will probably continue to go up in 2024. IT budget management helps your company conserve finances but spend appropriately where the business needs to. IT managers at small and midsize businesses are often faced with making hard annual choices by asking one question: What can we live without?

That's when it’s time to start putting pen to paper on planning your IT budget. Your IT budget categories could include a variety of things, such as computer equipment, network architecture, cloud fees, Software-as-a-Service (SaaS) fees, user licenses, and more.

Prioritize your highest needs first when budgeting for new IT tech

First, it’s helpful to list out everything you’re currently spending your IT budget on. That includes in-house employees, outsourced managed IT services, product subscription fees, data storage costs, and more. Once you have a comprehensive grasp of exactly what you’re spending money on, you can rank your IT department budget items in order of importance.

For example, if you need your IT budget to remain the same, but you know costs are going to go up, you’ll have to cut IT services or put off projects until next year. Maybe you can negotiate a shorter contract with a SaaS vendor or pay upfront for cloud storage at a discount. Prioritize your highest needs first, which typically include infrastructure and cybersecurity, the two things that keep your business running daily.

“51% of small businesses have no cybersecurity measures in place, but cybersecurity is critical to protecting a small business. Failure to budget for security can have major negative consequences,” says John Minnix, Founder & CEO at Brightlio.^[1]

Review the previous year’s IT budget

Next, review the previous year’s IT budget. See what line items went over and what cost less than you budgeted for. Perhaps the marketing team used fewer SaaS licenses, or you didn’t need to upgrade physical hardware as often as you thought. Edit your new IT budget to reflect what you actually spent last year. Managing IT budgets means assessing your spending last year to help lay the baseline for the next year’s IT spending.

List recurring IT business expenses

Also, it is helpful to list recurring IT business expenses, including the cadence of payments, any auto-renew contracts, and exactly what you get from these expenses. As remote work became the norm, you might have overinvested in SaaS platforms or another type of IT services, and now, as workers return to the office, you may want to cancel some of those subscriptions. List out any contracts you’ve already agreed to for the year.

Research your options

Once you know what you spent money on last year and the recurring IT expenses you’re already committed to for this year, start researching different options of vendors, platforms, and applications. You have a list of your highest priority needs, so don’t be afraid to shop around for different pricing and options for those.

Assess the strengths and weaknesses of every choice

After you’ve identified your list of alternatives, assess the strengths and weaknesses of every company and choice. Perhaps one tech vendor costs less money but demands a longer contract. Maybe bundling everything in one managed IT service provider saves you money over working with four to five different companies.

Determine your ROI

Now, it’s time to determine your potential ROI on existing and new technologies. ROI can be defined as revenue, time, efficiency, or anything else that improves the health of your business. When examining your potential ROI, you need to assess more than just the costs versus the benefits. You have to look at current industry best practices, when and if the product will become outdated, and how much support you can expect for the product in coming years. With a thorough analysis of these factors, you’ll be able to make an informed decision about what technology to invest in and what will generate the most impact in the long term.

Future-proof your investment

Setting aside a portion of IT spending for emerging technologies, such as new cybersecurity tools or generative AI, helps future-proof your business. While you don’t need to allocate a major chunk of your budget to emerging tech, it is important to allot funds to try something new. You might just find that autonomous robots massively improve production, or a simple upgrade in your cloud storage system increases productivity and access to data.

In Gartner’s research report, IT Budget & Efficiency Benchmark, chief information officers encourage leaders to tell a strategic narrative around IT spending instead of simply listing off costs.^[2] How does this technology or tool impact your business five to ten years in the future? What kind of competitive edge can you gain from its implementation? Craft a narrative around the long-term vision for your IT department, which can help capture the budget for future-proofing investments.

Establish timelines for implementation

Depending on the scope and complexity of the technology, it could take weeks or months to be fully implemented. Plan for thorough implementation and onboarding time depending on whether you’re outsourcing to a third-party provider or bringing something in-house. If you’re implementing IT technology in-house, you should plan for training, onboarding, and adoption time for your internal team. If you’re outsourcing a function such as cybersecurity, build in time for the vendor to make a thorough assessment, come back with recommendations, and then begin work on implementation.

Consider outsourcing some aspects of your IT

Speaking of in-house versus outsourcing, IT is one of the most popular departments to outsource. It’s often significantly more cost-effective to work with a third-party provider versus managing in-house talent. For example, cybersecurity has a huge talent and skills shortage, and the average salary is quite high. It takes continuous training and development to stay abreast of the latest certifications and developments. Many small businesses don’t have the resources or money to maintain this level of cybersecurity talent in-house. Outsourcing is typically more cost-effective, saves time, and allows internal teams to stay focused on what they do best.

Be thorough in your IT tech and resources budget allocation

After you’ve done all this work to develop your IT budget, be thorough in your tech and resource allocation. Aim on the high end so you have plenty of funds to cover unexpected charges or overruns. Thoroughly assess everything—from employees’ company-sponsored mobile devices to estimated cloud storage needs and server capabilities—to adequately project IT spending.

Stick with your IT budget

For small business leaders, it’s critical to allocate funds to one of the most important functions of your business: IT. A thorough IT budget provides a level of financial stability and transparency, allowing you to prioritize needs, assess and compare last year’s spending, and allocate funds to the items with the highest returns on investment. While IT tech is a necessary investment, you also need to protect your company’s bottom line by having the right tools in your arsenal to ensure your company stays at the forefront of technological upgrades that can keep your business competitive in your industry.

Your IT budget can include hundreds of items, so it’s best to start this assessment early in the year. Start prioritizing your needs, listing recurring expenses, researching your various options, and considering the strengths and weaknesses of each individual choice.