Most companies have an IT department. Those who manage these departments have to report their activity and the units they consume or produce. One common practice is to report the IT expense as a percentage of revenue. This is a good method to show a CEO how some of the company money are spent to bring some palpable results.
IT expense as a percentage of revenue
Calculating IT expense as revenue results in a ratio which reflects the reality of spending. Ratios in general reflect the situation of the company. They allow their CEOs to evaluate their activity and see if it is profitable or not.
Most of the financial activity of a company is measured through all kinds of ratios, so a new practice arose. People started measuring IT expense as a percentage of revenue. This means that the amount of money spent for IT activity is regarded as an expense necessary to the business.
Tricks on measuring IT expense
Since this ratio looks strictly at costs and not at earnings, the results will naturally go downwards. This affected the interests of the IT officials, who have chosen a strict direction. When calculating the IT figures, the officials no longer look at the interests of customers, methods to be more productive or to increase the revenue. They only seek to cut the expenses and get a better ratio.
What does the IT ratio express?
To interpret this ratio, the CEO and other company officials should know their company really well. Also, they should be familiar with the IT department. The process requires an overall understanding of their field of work. To perform the IT ratio calculation, you need to look at a series of surveys. This way, you’ll get an image of the state of your IT departments.
However, it’s not so easy to interpret such a rate. If it is much too high, you might have reasons to be worried. Also, it can mean you just made plenty of investments to improve your IT services and departments. Far from being a bad sign, this is something good. The results vary from one company to another, depending on what they deal with. For some of them, a high ratio isn’t always a bad omen.
How to calculate IT expense as a percentage of revenue
CEOs are interested in the costs of an IT department or, more precisely, in the amount of money spent as a percentage of revenue. Therefore, they only want to see the final result. This final result is the ratio that sums up the IT situation in the company.
A formula for the ratio
To calculate this ratio, you can use a special formula. This requires you to know some data on the IT activity, but also on the overall situation of the company. You get that ratio if you divide the total IT expenses to the revenue of the entire company.
After you get the result, you can illustrate it into a graphic that will make everything easier to understand. This way, you won’t only see the actual situation of IT in the company. You will also be able to make future plans.
Having a visual representation will tell you what to expect from the company. Also, you’ll know how to plan the next investments in the field of technology. Also, knowing about the ratio of similar companies can be of great help. This way, you’ll see where your business stands, and maybe find out what you need to improve.
Use a spreadsheet to build the graphic
An easier way to visually represent the figures is through a graphic. To build it, you can use a tool. This way, if the numbers are accurate, the tool will build the right graphic for you. Here is how to fill in the columns and rows.
Build two columns in the spreadsheet. One is for the overall revenue of the company, and the other one for IT expenses. In the first column, insert all the numbers related to company revenue. If the IT department is part of a smaller part of the company, insert those figures in the spreadsheet.
When you switch to the IT column, make sure you add your entire budget dedicated to the IT department. Make sure you don’t forget any expense that is related to the technology field. Insert even those figures that haven’t been directly related to your actual budget, but were still necessary for IT development.
How to look at the result
When you’re done with the calculations and the graphic, look at the broad image of your company’s IT expenses. Study it both locally, in the context of your own business, but also at a bigger scale. If you want to improve your financial situation, you can compare this picture with the ratios of similar companies.
The importance of IT expenses as a percentage of revenue
Calculating IT expenses as a percentage of revenue can bring a series of advantages. This includes the influence on the billing process, which also requires a lot of funds. If the company is able to do it automatically, it can become both easier and quicker.
The IT department can use the figures resulted from the calculation and present it to the CEO. Then, they can explain the reasons why they should consider investing more in the technological department. If the CEO has a visual example of the IT expenses, as well as a clear number for it, it might be easier to make some decisions.
Choosing to invest in technology is a great thing to do, even if it requires some funds. However, these investments represent a one-time cost. The benefits that result can cut plenty of future expenses and increase the revenue of the company.
Calculating IT expenses as a percentage of revenue allows company officials to shape their view on future investments. A bigger IT expense ratio should be carefully interpreted, as a big ratio isn’t always a bad thing. Most of the time, IT investments are a sensible decision, as a one-time cost can bring dozens of benefits in the future.