How to budget for your major technology purchase
Making a major information technology purchase is a little like buying a house or car. What you want and what you can afford may be two very different things.
That’s why a realistic budget is one of the first things you should set when thinking about buying new technology. It’s common for companies to misjudge the costs involved and to overlook key budget items, such as implementation, maintenance, updates and unexpected problems.
Here some suggestions on how to budget for an IT purchase.
1) Determine a cost range—Get a rough idea of the cost of the technology you’re considering. You can establish a cost range by talking with other businesses, trade associations, your advisory board and professionals you work with, such as your accountant.
If you hire an outside expert to advise you on your technology purchase, they should be able to give you an idea of the cost of various systems based on your industry and number of employees.
2) Prioritize your needs—Fully satisfying all your IT needs will often cost more than you can afford. Everyone wants the best of everything for their business, but you shouldn’t shop for a Ferrari when all you can afford is a Chrysler minivan.
It’s helpful to prioritize your needs by dividing them up into the following categories.
- Critical
- Important in two or three years
- Nice to have but not essential
Look for technology that satisfies your critical needs while also giving you the option of scaling up and adding on in the future.
Also, to save costs, explore buying cloud-based software as opposed to an on-premise application. Be mindful of the security and data accessibility implications of both options.
3) Include all expenses—It’s common to overlook some key expenses when making a technology budget, such as implementation and maintenance.
Businesses often think they can buy a major new software system, install it, and it’s ready to go. But it usually doesn’t work like that.
On top of other costs, you should include a buffer in your budget for unforeseen expenses—say, 5 to 10% of the total.
For example, if you’re buying an ERP system, you may need 12 to 18 months to configure it and train employees. And once a new software system is up and running, annual costs for maintenance, support and updates are typically around 20% of the original price of the software.
Also be sure to consider how much time it will take employees to get used to the new system. You may need to budget for a temporary period of lower productivity. Major change is rarely easy. Productivity can go down, stress can go up, and that impacts the business.
On top of other costs, you should include a buffer in your budget for unforeseen expenses—say, 5 to 10% of the total.
4) Consider financing—If your budget isn’t enough to meet your needs, you may need to get financing.
The ideal financing for an IT purchase is a business loan whose term is matched to the lifespan of the asset. For example, computer hardware typically lasts three to five years, so a loan of three to five years is appropriate. You don’t want to still be paying off the loan when it’s time to replace the technology.