Budgeting for IT: On-Prem and Perpetual Software and Licensing

In today’s digital world, software plays a crucial role in your small and medium-sized businesses (SMBs). It helps your operations run smoothly, makes things more efficient, and keeps you competitive. Let’s discuss budgeting for on-premises software, like Microsoft Office, QuickBooks, and industry-specific software. We can also include any server licensing. We’ll explain why this budget item is so important and how purchasing on-premises software differs from subscribing to cloud-based options.

Assessing Your Software Needs

Before we dive into budgeting, let’s discuss a critical step: assessing your software needs. It’s a bit like taking stock of your toolkit. You need to understand the unique requirements of your team members across various departments. This audit helps identify the tools you have and whether they’re doing the job right. And don’t forget compatibility: you also need to make sure that what you have and what you want to have can integrate and “play nicely” together—or you may have bigger problems on your hands.

Budgeting Strategies for On-Premises Software

Now, let’s talk about budgeting. Effective budgeting strategies are essential for managing software costs smartly. Consider adopting a Total Cost of Ownership (TCO) approach. It’s like looking at the big picture – not just the upfront costs but also the ongoing ones like maintenance and updates. Licensing is another area where you hold the reins. Decide between per-user or per-device licenses based on your needs. For things like Microsoft Server Client Access Licenses (CAL), this decision can make a huge difference. And remember to set aside funds for software updates and maintenance – think of it as ensuring your toolkit stays sharp.

Licensing and vendor negotiation can be your secret weapon in controlling software expenses. When dealing with vendors, think of it like striking a friendly deal. We’re talking about navigating software licensing models and agreements. If you have a larger team, volume licensing can be your friend. Negotiating software contracts should be a win-win. When done right, it can lead to cost savings. And don’t forget to explore options like bundling or long-term agreements for added value.

Being able to make decisions on TCO and negotiations is one of the benefits of purchasing on-premises software, as opposed to SaaS or subscription software that may come with a set non-negotiable price.

Classifying Software Expenses

Understanding how software expenses are classified is essential for accurate financial reporting and budget management, which are critical to your business operations. Let’s clarify the distinction between Capital Expenditure (CapEx) and Operating Expenditure (OpEx) in terms of software costs:

CapEx Scenarios:

  • When Software Enhances Asset Value: This situation arises when you invest in software that directly increases the overall value of your business assets. For instance, if you purchase and implement specialized software that significantly improves your manufacturing process, resulting in higher-quality products and increased market value, this is considered CapEx)
  • Custom Development Projects: Custom software development projects, tailored specifically to your business needs, often fall under CapEx. These projects usually involve significant upfront costs for designing, creating, and implementing software solutions unique to your SMB.
  • Amortization: Amortization is like spreading the cost of software over time. If your business invests in high-cost software that benefits you over several years, you can amortize the expense. This means recognizing the cost gradually instead of all at once, which aligns with CapEx accounting practices.

OpEx Scenarios:

  • Off-the-Shelf Software: Off-the-shelf software refers to ready-made software solutions available for purchase. When you buy software that doesn’t directly enhance the value of your business assets but serves essential operational functions, it’s typically treated as an Operating Expenditure (OpEx). Examples include office productivity software like Microsoft Office or antivirus software.
  • Routine Maintenance and Updates: Regular maintenance and updates for your software to keep it running smoothly are part of your ongoing operational expenses. These costs fall under OpEx. It’s like maintaining and servicing your company vehicles; it’s necessary for day-to-day operations but doesn’t increase the asset value.

Knowing which budgeting scenario you’re looking at can help you make better decisions about purchasing on-premises software.

Ready to Start Budgeting?

Budgeting for on-premises software is an essential part of how you lead your SMB. When it comes to this complex task, you can get help from experts like managed service providers (MSPs), virtual Chief Information Officers (vCIOs), and Technology Alignment Managers (TAMs). They can partner with you to help you plan solutions to optimize your on-premises software for your business processes. Good budgeting doesn’t just control costs; it also enables you to use technology to make your business more productive, secure, and competitive.

Need some advice or help getting started? IT professionals are available to answer all your questions, so get in touch today.


Budgeting for on-premises software can be complex but is essential for SMBs. To control expenses, consider licensing decisions, negotiate with vendors, bundle long-term agreements, and understand the distinction between capital and operational expenditures. Experts like managed service providers, virtual CIOs, and TAMs can help optimize on-premises software. Contact IT professionals today to start budgeting for a more productive, secure, and competitive business.

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