IT Budgeting and Planning: Capital vs. Operational Expenses


In a previous post, we discussed how IT budgeting and planning can make it possible for organizations to focus more on strategic growth initiatives instead of simply keeping the lights on. By conveying the true value of IT and following Gartner’s “Run, Grow and Transform” model, smart budgeting and planning can reduce risk, increase flexibility, improve customer service and productivity, and drive innovation.

A lack of understanding about the difference between capital and operational expenses is a common challenge when it’s time to discuss the IT budget. From an IT perspective, capital expenses typically involve investments in on-premises technology that you expect to last more than one year. This involves procurement, installation and configuration, whether these steps are handled by your in-house staff or an outside vendor.

However, with most capital expenses for IT, you need to consider the operational costs as these assets must be maintained, upgraded, powered and cooled. An increase in capital expenses usually brings an increase on the operational side because new hardware and software must be managed and supported.

Operational expenses include your day-to-day costs and the purchase of assets that you expect to last less than one year. Outsourcing certain tasks and using cloud-based services shift the capital expense to a service provider, along with the maintenance-related operational expenses. Outsourcing and cloud services require only the operational expense of a monthly fee.

However, cost should not be the only factor when determining which technology, services and applications should be kept in-house and which should be moved to the cloud. You need to determine which model will best support your business goals and processes. In other words, it’s rarely a good idea to move everything to the cloud. Many organizations utilize a hybrid approach, keeping certain services, applications and data on-premises while others are moved to the cloud.

According to Info Tech Research Group, one-third of an organization’s expenditures should go to capital expenses, while the remaining two thirds are used for operational expenses. This can and should be adjusted according to your business needs, but it provides a good starting point for planning your IT strategy and budget.

Keep in mind that operational expenses are often tax deductible, while capital expenses must be depreciated, meaning you can deduct a portion of an asset’s cost each year during the life of the asset. Operational expenses tend to be more advantageous from a tax standpoint, although we recommend consulting a tax advisor to discuss your specific situation.

The organization with the most toys does not win, at least when we’re talking about IT. More important than hardware and software is having reliable, around-the-clock access to the latest tools and services., your outsourced IT department, can guide you through the budgeting and planning process. Let us help you make sure your entire IT environment, on-premises and in the cloud, is working together to help you achieve your business goals.