As you prepare for 2024, now is the time to re-evaluate your IT budget. In this economy, everyone is trying to streamline operations and save money wherever they can. Many small business owners see IT as a minimal expense. I don’t blame them for that. It wasn’t too long ago when a small business could get by using Microsoft Office, paper, a traditional phone line, and other offline tools.
For most industries, digital transformation is slower when you’re a small business, especially those who have been in business for more than ten years. And that tracks. If you’re a small business unwilling to progress and invest in technology, it’s no wonder you’re not growing in a digital-forward economy. So what should a small business spend on IT?
Technology, once a mere facilitator of operations, has become a critical component of business strategy and success – even for a small business. Throw in a dash of rapidly evolving cyber threats and you have the perfect mix of obfuscated budget forecasting for 2024.
So how much should your small business be spending on IT?
While there’s no one-size-fits-all answer, allocating 4-8% of your revenue to IT services is emerging as a strategic baseline. Let’s explore why this range is becoming a benchmark for small businesses today.
Why You Need to Spend 4-8% of Your Budget on IT
Enhanced Security: Cyber threats are becoming increasingly sophisticated, and small businesses are often targets. If you can’t answer the question – What am I going to do if I am hacked? – It’s a red flag that you need to take a hard look at your IT budget.
It’s easy to ignore an investment in cybersecurity until you’re a victim of a cybercrime that could damage your reputation, lose customers, or even put you out of business.
“But I don’t know anyone who has been hacked.” That’s not necessarily true. When a small business is hacked, they often do not meet the threshold for mandatory reporting. This means you’re probably not going to find out if your neighbor was the victim of a cybercrime. Being hacked is not a proud moment for a small business, so you will likely never know it happened.
Investing in robust cybersecurity measures helps safeguard your small business and your customer’s data.
If you don’t have a cyber liability insurance policy this is also a red flag that you need to reevaluate your IT budget. And even if you do have one, there is a possibility you do not have the security measures in place to cash out on a claim.
Just a couple years ago the cyber liability insurance applications I saw were about 12 questions long. I’ve been helping clients fill out applications this year that are over 50 questions long. As more small businesses get hacked, more claims will be filed. You need to make sure you are well positioned against cyber threats and have the insurance policies in place in the event something does happen. This requires planning and strategic investment.
As a side note, if you have not done a cybersecurity risk assessment this year you are at a greater risk because you don’t even know what improvements must be made to protect yourself.
Operational Efficiency: IT services streamline operations. From automated workflows to cloud computing, investing in these technologies can drastically improve efficiency, reducing costs in the long run. Without modern IT solutions, your small business might struggle with slower response times to market changes, customer inquiries, and internal communication.
An insufficient IT investment often means continued reliance on manual processes, which are less efficient and more error-prone than automated ones. You don’t know what you are missing. Unfortunately for you, your competitors know exactly what you’re missing and they’re counting on you to do nothing about it.
Competitive Edge: Using outdated technology can put your small business at a disadvantage compared to your competitors who leverage more modern, efficient tools.
For example, I received a referral from one of my clients in the healthcare space. My client is a doctor who has an interest in HIPAA compliance (green flag), using new technology to streamline operations (green flag), and allocates an ample IT budget to grow and secure his practice (green flag). The referral was for another doctor’s office nearby my client’s main clinic.
To my surprise, this doctor had an IT emergency and no IT services company on retainer to help (red flag), didn’t have an IT budget (red flag), and was still using paper charts (flaming red flag). It took only a few minutes on a call to see that this referral was not a forward-thinking type of business owner. He was more concerned with the shortsighted, “What’s it going to cost me?” instead of thinking, “What do I need to invest to grow and secure my business?”
Why should the small business spend on IT equate to 4-8% of your revenue?
This range is not arbitrary. It’s a reflection of the growing importance of IT in business operations. The 4% allocation is often considered the baseline, suitable for maintaining current IT infrastructure and covering essential upgrades and cybersecurity measures. It’s a defensive strategy, aimed at keeping your small business secure and operational.
The 8% allocation is usually seen with companies interested in adopting a more aggressive, growth-oriented approach. It means not just maintaining but actively improving and expanding their IT capabilities. This could involve investing in new technologies, advanced cybersecurity defenses, and digital transformation initiatives. It may be a small medical practice that intends on establishing additional offices while maintaining ongoing HIPAA compliance. Or perhaps an attorney’s office who wants to move their onsite servers into the cloud while enabling remote employees to work efficiently and securely.
Worth mentioning, if you’re a startup or a very small company, it’s highly likely your IT spend will be closer to the 8% range and will gradually drop as your business grows.
Tailoring to Your Business Needs
Every business is different. The right small business spend on IT depends on your industry, business model, growth stage, and specific challenges and opportunities. Here are some factors to consider:
- Industry Requirements: Some industries may require more advanced IT infrastructure due to regulatory compliance or heavy reliance on data analytics.
- Growth Stage: Startups might need to invest a higher percentage to establish their IT infrastructure, while established businesses might require less.
- Future Goals: If your strategy involves significant digital transformation or expansion, a higher investment in IT services might be necessary.
Investing 4-8% of your revenue in IT services is not just about keeping up with technological advancements; it’s about positioning your small business for success in a digital-first future. This strategic allocation can enhance your security, efficiency, and competitive edge. Remember, the key is to tailor this investment to align with your specific business goals and needs.
I meet with my clients quarterly to review their IT goals and benchmarks. The IT budget is an ongoing conversation, so that it meets the changing needs of their growing business. If you are not spending at least 4% of your revenue on IT and want to better understand where your technology and cybersecurity gaps are, feel free to contact me for an assessment.