Capital, operational, or none at all: How to fund your IT expenditure

Although it’s always prudent to manage your cashflow and profit well, now more than ever options need to be considered to fund expenditure for your business needs.

There is no question that it takes careful planning to decide what IT is required prior to the investment decision. However, assuming you’re at that point, the next question to answer is whether you’re using the best funding approach for your IT requirements? (Please note: This is not financial advice but a strategic consideration of options for driving business success in tough economic times. I am, after all, an IT guy not a financial advisor/accountant.)

Capital expenditure can be achieved using leasing or hire purchase options, which help retain cash reserves (to be used on higher yielding outcomes), and are generally more tax effective and are funded from company cashflow. Many business owners see capital investment in their business as an extension of their personal finances.

I frequently see this from company owners who, when asked if they would like to use finance to purchase their new IT equipment, prefer to use surplus cash in the business – nice when cash is easy to come by and, yes, it might keep the accounting simple. However, it’s not necessarily the wisest choice when you consider the time value of money and in most cases the tax effectiveness of this approach. I’m sure you’ve all heard the term, “Cash is king!”

However, using finance will require some form of security and/or director’s guarantee, which some business can’t or choose not to provide.

So how do we shift from capital expenditure (cap ex) to operational expenditure (op ex)? And is there an option for no expenditure (no ex)?

Today, if we are considering server upgrades or worse – we have waited until the equipment has undergone a catastrophic failure forcing us to act now – then it is worth contemplating a couple of alternatives to forking out cash.

The old solution was to go shopping for the required equipment and put it all on a finance deal so we pay it over time. We would select equipment with some capacity planning to try to anticipate the needs of the business over three to five years, buy the box, and cross our fingers that we made the right choice. The solution plays out over the following years and it may be too big or too small, but the investment has been made.

Worse is that you become one of the 2,655 businesses in administration each month and still have to pay for the equipment you purchased. There is now an alternative to the op ex model described above. It uses cloud-based delivery supported by a financial subscriber model to buy exactly what we need month-to-month and pay on an as-you-go basis where you don’t have to own or pay off equipment. You simply pay for what you need.

If you add staff, you add subscriptions; if you reduce staff, you reduce subscriptions. This model completely removes capital expenditure and ensures you are not paying today for the systems you might need tomorrow. It scales up and scales down elastically, ensuring your cash is used for exactly what you need. It’s still a form of operational expenditure, but without the security and director’s guarantees.

So is there a zero expenditure option for IT systems? Well, no, not in the foreseeable future and it is well documented in the industry that the hidden costs of spending nothing on IT are immense. It is still important to reduce risk in business and to set up and maintain systems that ensure we are working productively. Computer down time still costs more than computer support fees.

However, there is another advantage becoming quite apparent with the cloud-based technology. It is reducing the need for local full-time staffing on IT support: as the load on your company owned and operated infrastructure reduces, so does the need for support personnel.

More than ever, it is time for business owners to review IT salary expense to ensure they are spending support dollars wisely. It might even be possible to reduce salaries to the point where they can be converted to cover support and subscription costs so effectively that you remove capital expense, save money and pay for outsourced services and subscription licensing to get all you need with no budget impact and maybe even an expenditure reduction.

So, the short message: Don’t let IT costs hide in staff and contractor salaries when you could get the latest technologies for the money you are already spending or less. This technology advantage could put you in the driving seat when the economy returns to growth.

Of course, those salaried workers in your IT department are not about to help you to resolve this problem, as it might mean their redundancy. So seek advice externally to get the right alignment of interests.

David Markus is the founder of Combo – the IT services company that ensures IT is never an impediment to growth.