Business System Consultation Center - Our Business System ColumnVol.83 2018.04.01 Takahashi Minoru

What is an appropriate budget for a business system?

Thank you for your interest and continued support.
This is Takahashi from the Marketing Plan Research Laboratory.


It is said that the average ratio of IT investment to sales revenue across all industries is approximately 1%.
For example, if a company’s sales are 1 billion yen, 1% of that is 10 million yen.
This means that, on average, a company with 1 billion yen in revenue has an annual IT budget of 10 million yen.
(You can easily find plenty of information like this with a quick search.)


So, what is that 10 million yen spent on?
The breakdown is generally as follows:


① One-fifth for system development costs
They capitalize the system as an asset, set its useful life at 5 years,
and depreciate it by 20% (one-fifth) annually, recording that amount as an IT investment.
(Example) System development cost of 25 million yen ÷ 5 = 5 million yen/year
*Note: This is not the full amount of the system development cost


② Annual amount of recurring payments, such as system maintenance and usage fees
For expenses incurred on a regular basis (such as monthly or annual fees) in connection with system use,
the annual cost of these payments is recorded as IT investment.
(Example) Monthly system maintenance fee of 200,000 yen × 12 = 2.4 million yen/year


③ Hardware costs (e.g., computers)
This is the total cost of computers and other hardware purchased during the fiscal year.
(For depreciable assets, use one-fifth of the cost)
For PCs, this is typically around 130,000 to 190,000 yen per unit.


④ IT consulting fees, etc. (if any)


The total of items ① through ④ above is primarily treated as IT investment.


Looking at this, it becomes clear that even just making “average” IT investments
you’ll see that you’ll need to be quite creative with your cash flow management.
It would be counterproductive for a company to go under due to IT investments, so if the setup costs seem high,
we recommend implementing a pilot project using a low-cost system based on priority,
or consider financial arrangements such as leasing contracts.


That's all, Thank you for reading.

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