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Calculating R&D Budget

The content from this post originates from the 2023 Budget Planning Guide for R&D Organizations. Download the full guide for more information regarding the trends driving R&D Planning in 2023.   

Annual Budget Planning is the ultimate exercise in priority setting, and it’s not a task to be taken lightly. This sentiment is especially true during uncertain economic times. Decisions about where your resources will be focused could have significant consequences when there’s little room for error. As we head into planning for 2023, this scenario rings true as many organizations and their leaders are finding they lack clarity on what the future looks like. More than ever, the CEO, Finance, and Engineering need to come together to plan for a nebulous future.

The Current State of Budget Planning

For this post, we’d like to discuss a key question that most leaders have: are we investing enough in our R&D efforts? How much are other organizations investing and what is right for us? How should this be influenced by the stage my company is at or how the uncertain economic environment affects us? Let’s dive in and see what the data tells us about some of the answers to these questions.

In a recent survey, Jellyfish asked engineering leaders and management to comment on the current state of yearly planning. Some of the notable takeaways from this survey included:

  • 36% of R&D teams have reported that budgets have increased by 10% over the past 3 years.
  • Leaders spent an average of 38.6% of the operating budget on R&D, but the exact amounts varied drastically by company size and maturity.
  • Leaders and management remain optimistic about their growth potential next year with 51.6% expecting their team to grow in the next year.
  • Leaders and management expect company revenue to be unaffected by the economic uncertainty with 68% expecting revenue growth next year.

These survey findings could signal a few important factors for engineering and finance leaders during this planning cycle. Overall, the economy is uncertain, and some companies are preparing for a slowdown. But engineering management (until recently) has been optimistic despite the uncertainty. If Finance and R&D work together to manage resource allocation appropriately through this planning cycle, it’s possible to continue to see teams through a turbulent economy. Now more than ever, resource allocation, re-prioritizing the roadmap, and collaborative conversations about how to fund strategic priorities are key.

Setting the R&D Budget

Established organizations usually have historical context to which they can refer as they determine the annual budget for R&D. For planning purposes, many engineering leaders start with a baseline operating budget from last year, and adjust their plans based on company financial targets, and the costs of the new teams that they expect to hire.

Startups and smaller companies often do not have processes to facilitate this. In this critical stage, R&D can be the largest part of the operating budget. Based on the survey results, engineering report that they are spending about 38.6% of their annual operating budget on R&D teams, with smaller and newer teams often spending a greater percentage than older and larger ones. Most of the differences can be attributed to company size and the length of time that they’ve been operating, whereas startups and small companies still building the product are investing heavily in their R&D organizations.

What R&D Budget Range is Recommended?

Some consulting organizations recommend setting a range between 10-20% of your gross operating income, and then adjusting it as required. But the key to finding the right amount is an open collaboration between the CEO, R&D, and finance leaders. Knowing budget requirements early in the development of the product requires a clear understanding of immediate R&D priorities. If you need to hire a team to build out essential new features, it’s imperative to understand and be able to anticipate the resources required to build those features. Based on recent survey data, teams seem to underestimate the resources required to build new features. Nearly 42% of respondents reported that new feature work is the most likely to require more resources than initially planned. This data suggests that if certain feature work is imperative to business success, it would be worth taking a less conservative estimate regarding resource requirements.