Budgeting for IT
By Jim Hauer, Owner, HCS Tech
This is mistake number three (in no particular order) that small businesses make. It is the third part of my 10 overheard IT mistakes common to most Small Businesses.
It’s too hard to budget or plan for IT so we just don’t, nobody else does either do they?
Without an IT budget, your IT expenses can look like a roller coaster. If your small business is like mine, unplanned expenses, big expenses, can really cause havoc with my P&L. It is not as hard to flatten out monthly IT costs as you may think.
Necessary Upkeep and Maintenance
IT needs in any business, including small businesses, has become an integral part of your infrastructure. Can you imagine running a business or even your life without a computer, tablet, or smartphone? Yet with changing technology I have rarely seen a small business that has a budget item for IT. Computers break, but no one seems to want to budget for repairs. Technology changes, but no one seems to want to budget for new equipment.
According to a Gartner Group article I have cited in previous blogs, more than half of the cost of owning computers comes from maintenance, upkeep, downtime, and repair. So, if you have $12,000 of computer equipment, you should expect to budget at least $12,000 over a three year period, or $4,000 per year just to keep things running. This price includes keeping virus protection current, backing up files, spam filtering, monitoring, and maintenance. Yet, most small businesses fail to budget for this expense.
Computers have a useful shelf life, typically 3-5 years for desktop computers. After 5 years, the operating systems have probably been updated twice, requiring more memory; and the software that came with the computer has also been upgraded at least once if not more, again often times requiring greater processor speed and more memory.
Small businesses need to follow the lead of larger businesses by budgeting for system and equipment upgrades. Several small business owners I know budget to replace one computer every year. Not a very good idea, because that means you have computers that may have a 5 year range in age, operating systems, software versions, processing power, and memory. More about this dilemma in a future blog. If at all possible, budget to replace everything at the same time every 3 years, your total cost of ownership will diminish greatly, you’ll have happy employees, and a system that works seamlessly together.
Owning vs. Leasing vs. Renting
The best way I have seen to budget for IT over a three year period is to rent your equipment, but here is a discussion of all three options.
Owning – Most small businesses find it difficult to find the capital to buy all new equipment, replacing everything. Although this is by far the best option as I will discuss in a later blog. If capital is short, perhaps a small business loan for equipment is appropriate. A three year note, collateralized by the equipment is a very viable option. The note forces you to budget for that loan payment each month. Make sure though, that you include an equal figure each month for the required maintenance and upkeep discussed above. You also have to pay for repairs or replacement should a system fail. This extra expense can cause a spike in your already budgeted IT costs.
The negative with using your own capital or borrowing funds, is that it leaves you with less capital or borrowing power to invest in parts of your business that make you money. Take for example a retail store that turns inventory 4 times a year. That business is much better off using capital or borrowings to invest in inventory that will garner a profit for the business. By turning IT into an operating expense, you free up that capital to make you money.
Another negative of ownership is the discipline to do it all over again in 3 years. The temptation is to hold on to that older equipment because “it stills does the job”. But when is too old, too old? Again the temptation is to start doing one-off replacements which eventually puts you into the problem of a mixture of operating systems and machines.
What do you do with the older machines when they are ready to be replaced? It typically costs about $200 to decommission a machine. These costs include removing any data from the hard drive, physically removing the machine, and the cost associated with trying to sell it or actually disposing it.
Leasing – The typical leasing plan is not all that different from ownership. You need to talk to your tax consultant, but some leases need to be treated as capital expenses, while others can be viewed as operational expenses. While you might be guarding against using capital that could be used for more profitable investments, your borrowing power will certainly be affected.
Like ownership, don’t forget to budget for maintenance and upkeep. Also, you may have to pay for repairs or replacement should a system fail. This extra expense can cause a spike in your already budgeted IT costs.
Once the lease is done, the equipment is yours either through a $1 buyout or a fair market value buyout at the end of the lease. Just like ownership, you have the temptation of hanging on to the equipment for too long. You also have the problem of what to do with the old equipment if you do make the smart choice to replace it in three years.
Renting – By renting the equipment you are not using any capital or any borrowing capacity. The use of the equipment is an operational expense that is easily budgeted. Most companies that offer rental programs also bundle the rental with maintenance and upkeep programs. The owner of the equipment wants to keep the equipment in good running condition, which is to your benefit when it comes to total cost of ownership and budgeting. If a piece of equipment fails, it is their responsibility to replace it or fix it. The rental company that bundles services can keep their rental fees relatively in line with ownership costs because a good maintenance program can reduce the total cost of ownership by as much as 42% according to the Gartner Group.
At the end of a rental term, typically 3 years, the owner will replace the equipment with all new equipment, and the rental fee will probably be pretty close to what you were paying. During that rental period, you can also add more machines to the rental contract, or in some cases, downsize with very little penalty. The owner is responsible for disposing of the equipment. As mentioned before it generally costs about $200 to decommission a machine. Your rental provider is now responsible for decommissioning the old machines they replace.
Your budget remains flat with no unexpected repair or replacements costs over the life of rental term.
If planned well and understanding all of the costs associated with IT equipment, maintenance, and upkeep, you can accurately budget for IT expenses. Failure to do so will cause you to have unexpected expenses throughout the year, which can cause havoc with your cash flow. Take the time to analyze the best way to meet your continuing IT expenses. Find an IT partner that has your best interest in mind and work with them to find the best solution for your small business.