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5 Tips to Help You Set An R&D Budget

Posted on June 15, 2021

“A budget is telling your money where to go instead of wondering where it went.” – Dave Ramsey

Creating an R&D budget can be a lengthy and complex process that can often require involvement from numerous organizations and departments, and not to mention the endless approvals from supervisors and the individuals above them. The practice of R&D is vital for the modern world of innovation, discovering solutions to new or existing problems or updating old products and services to make them better and set them ahead of the competition.  Some of the main components that need to be considered in an R&D budget are revenue growth, operating costs, capital requirements and more, ensuring that you are using accurate data will ensure that the budget is as precise as possible and realistic.

  • Outline Your Goals

Defining the goals and outcomes of the project will be the first step when it comes to creating your R&D Budget. The amount that needs to be allocated for R&D will hugely depend on the type of product/service that you are developing, setting long and short-term objectives will mean that you have several goal points to check in with along the way, ensuring that your project is on target. Effectively managing your objectives will also help you to comprehend whether the correct amount of money is being put into effective parts of the project, an estimated 3% – 5% of annual revenue should be spent on innovation but depending on the importance of the project and the amount that customers would pay for your products/services, it may be higher.

  • Determine the Future of Your Market

Having a solid understanding of the market that your business is in and the future of it will ensure that all possible problems and solutions to be developed are brought to your attention, to ensure that you are meeting new levels of customer expectation always. By aligning your R&D resources and commercial functions, it will allow you to come up with ways to shape the market and force conversations, such as ones surrounding markets that could have a negative impact on the business, or what winning products and services look like to customers. Budgeting to leverage technology that will accelerate R&D efforts at a faster speed will help to optimise your budget, this will vary depending on the industry that the business is in. A growing reliance on software and new technology that helps industries to automate processes has meant that some areas of R&D have decreased, so working out whether factors such as this will have a large effect on your industry in the future is important to ensure you are prepared.

  • Consider Funding Possibilities

The funding process when it comes to creating R&D budgets can be very diverse and will change over time as more effective funding options are available, it can also change depending on the course that the R&D process goes. New technologies, products and services developed may end up requiring more funding than originally planned, so budget allocations and contingency plans should be put in place for possible losses of R&D funding along the way. It is also important to look further into local, national, and global public funding schemes put in place to help businesses complete R&D, this process can be made easier with the use of a Tax Specialist or overall expert of Research & Development.

  • Appreciate Your Capabilities

Over-estimating your company’s resources, abilities and constraints can be detrimental to the R&D process – which can greatly damage the success rate of a project, and not just financially. It would also be detrimental to underestimate your resources as then you could end up wasting project potential, so finding the right balance between the two sides and being honest with yourself and your business is key. The main defining factors that you should determine are your business’s ability to integrate your R&D strategies, project completion, project portfolio management, R&D expenditure and more. If you discover that your resources are outstretched or that you do not have enough, outsourcing R&D is always a possibility, or even searching for open innovation as an extension of the project, finding another person that is working on a similar project or may already have a solution.

  • Include Experts

Ensuring that the team that is directly responsible for R&D are involved in discussions and developments within the projects is a necessity, they will offer the highest-quality insights into how the project is going but also their budgetary requirements for the project to be completed. By creating a strong network of experts surrounding the project, you are more likely to gain information about your products and services that you were not necessarily aware of, this is also a positive of hosting a collaborative project because it means that you can gain insights into areas of the project that you would not have had intel on.

Creating an R&D budget can seem like a difficult and confusing process, but following the tips in this article, it will help you to get the most out of your finances. Using clarity and dexterity combined with your businesses aspirations and future plans will fuel your R&D innovations. For more information about R&D Tax Credits, click here.