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How Much Should A Small Business Spend On Information Technology?

Investing In Technology

For small businesses, information technology spending is always a balancing act. On the one hand, you need to keep to your budget to maintain financial stability and weather the unexpected. On the other hand, you are well aware of the constant tech advances happening all around you and the last thing you want is to be left behind by the competition. So, how do you determine your IT spending? The answer is, “It depends.”

Spending on IT technology needs to be based on your unique business needs. While it can be helpful to know what the average spending is for businesses, particularly businesses similar to yours in your industry, duplicating what another company does will not necessarily yield optimal results. You have a limited budget. You need to make it count. Doing so requires carefully examining your business, your options, and most importantly, your company objectives. Only when you know where you are and where you want to go can you determine exactly what you need to spend on IT.

What is Everyone Else Spending on IT?

Just because you need to define your own path does not mean you should ignore what everyone else is doing. It can be a helpful starting point to examine how much other small businesses are spending on technology. According to one study, the average spending on IT across all industries was 3.28 percent. The average came from considering a wide range of industries, with the lowest spender being construction at less than 2 percent and the biggest spender being banking and securities at 7 percent.

A study focusing on industry alone does not give a clear idea of what small businesses are spending, though. Other studies that looked at the size of the business found that small and mid-sized businesses actually spent more on IT as a percentage of their revenue than large businesses. Small businesses spend around 6.9% of their revenue on information technology, while midsized businesses spend around 4.1% of their revenue on IT. For large companies, the percentage drops to 3.2%. The smaller percentage spent by larger companies is often the result of scale—they put so much money into IT that they get better rates, perform the work in-house, etc.

How to Decide What You Should Spend on IT

The best way to choose how much to spend on IT is to ask targeted questions designed to paint a clearer picture of what your IT needs actually are. These questions should include:

What are you spending on IT right now?

Every business needs an IT budget, regardless of size. If you don’t have an IT budget, now is the time to make one. To see how much you have been spending on IT, add up your expenditures on information technology over the past year.

What are your business goals?

With so many options available, it is normal to feel a little overwhelmed when you consider information technology. Clarifying your business goals gives you perspective on your IT needs. Your IT expenditures should help you achieve specific business objectives. If the money you are spending on IT is not helping you achieve those objectives in a measurable way, it can likely be better spent elsewhere—either on different IT tools or on other areas of your business.

How is your current IT spending related to your business goals?

Each IT area that you invest money in, can and should be connected to your business objectives. Go through all of your information technology spending and verify that it is doing something for your business. If it is not working for you it is time to make some changes.

What specific IT spending can improve your ability to achieve your objectives?

There are specific areas in IT that offer leverage for your industry. You will need to identify what these are and determine how they fit into your overall strategy. Collaboration, security, data collection, marketing—what tech are you fairly certain will make a substantial impact if you add it to your business?

In what ways can you delegate or outsource the IT budgeting process?

If you are like most owners or managers, you have limited bandwidth that is already mostly consumed by running your business. Assessing your IT needs and embarking on a path to meet those needs will take time, energy and expertise. Consider who you can get to help with this process, whether internally or externally.

Are you interested in learning more about your IT options? If so, please contact our managed IT services team. We can help you clarify your IT needs.

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