Research and development (R&D) expenditure can be defined as funds spent on projects which follow a systematic basis aimed at increasing the knowledge around an industry, application, method or product. R&D, through data and statistics, provides endless opportunities for all economies, industries and businesses to grow and evolve. When effectively executed, R&D should be seen as an investment rather than a cost. However, we understand expenditure can easily get away from a business finance team if funds are poorly managed.
According to R&D World, it is forecasted that $2.476 trillion will be invested globally towards R&D in 2022. This is a 5.43% increase on their 2021 figures. With majority of funding being used by a multitude of different global industries , it makes sense that some businesses lose track of their expenditure.
In this blog, we will cover some of the major expense areas within R&D activities and the steps you can take to keep costs in check.
Research Vs. Development Expenditure
Before we explain the major expenses involved in conducting R&D, we must first define the difference between research expenditure and development expenditure.
Research expenditure is often seen as a cost rather than an investment as it doesn’t directly result in a tangible asset with any worth. Despite some debate, the knowledge gained from research isn’t considered valuable until it is turned into something worth selling.
Contrastingly, development expenditure is seen as an investment because you are turning your research into a tangible asset such as a new product or service. This can then be capitalised, and value can be extracted from the development process.
R&D is a combination of both expenditure types. If the development is required to enable testing, such as a prototype expense, then this too can be claimed as an eligible R&D expense.
The Cost of Research
Younger businesses may devote a larger proportion of their expenditure to R&D as they take significant steps to grow in their formative years. As they age, businesses will typically settle into an R&D strategy which sees a set portion of their earnings go towards R&D, to ensure constant improvement is instilled in their culture.
For example, according to NASDAQ, Amazon was able to invest 11.1% of net sales into technology and content in the 2020 financial year. That amounted to a total of $42.74 billion spent on R&D, allowing them to register 2,244 patents for developments for things such as artificial intelligence and machine learning.
Fellow tech giant, Apple, reportedly invested 7% of net sales during its 2020 financial year, still amounting to $18.75 billion spent on R&D.
But where exactly were these dollars going?
The Australian Bureau of Statistics found that the fields of research most heavily invested in by Australian businesses were information and computer sciences ($7.092bn), followed by engineering ($5.268bn), and biomedical sciences ($2.190bn).
Let’s dig deeper…
One of the biggest expenses when conducting research is, in most cases, the labour costs. This could include any compensation such as annual wages, bonuses, holiday pay, overtime, and short-term contracts or contractors. Companies with the available resources may hire additional personnel to make up their R&D team, obviously incurring additional costs on top of their current team. Alternatively, if the research process is a simple one, these personnel could be sourced from within an existing team. The benefit of this would be that no extra salaries must be paid, while the downside is they are taken away from their usual mode of productivity.
The next level of costs associated with R&D are supplies and materials. This can extend from something as basic as electricity, water, gas, or travel expenses such as petrol, to more industry-specific equipment such as laboratory tools. If your research design is to simply investigate the industry through reading widely, then the costs of supporting materials may extend to subscriptions for libraries or scientific journals.
Once your research is conducted, further costs will come in the development stage as you manufacture products or redesign your business model. This can come with costs for patent registration and intellectual property rights. Once these changes or additions are made to your business, you may want to reevaluate your business insurance – but that’s a topic for another article!
Note that in most R&D tax incentives, this final stage is a commercialisation activity and typically wouldn’t attract special R&D incentives. So, it is worth checking your local jurisdictional rules to ensure you aren’t claiming what you shouldn’t be and conversely aren’t missing out on what you should.
How To Manage Your Expenditure
To ensure you don’t blow your R&D budget, it’s important to know what you’re getting yourself into.
Firstly, you should set that budget at a manageable level with room to move in case your findings call for further research. The point of R&D is to learn new things so there’s no telling what discovery you might stumble upon.
Researchers should understand all the steps to an effective R&D strategy and map out the time and costs of each stage. This way you can play around with which steps might need more financial attention, and which can do with less.
One of the best ways to save time and money on R&D is to harness the power of the internet. That means conducting surveys and workshops online rather than bringing people together or meeting in person. This also eliminates the need for expensive overseas travel.
The internet is a brimming hub of research resources and just a few subscriptions can unlock a world of industry insights that could provide the supporting background research to take your business to the next level.
Finally, many R&D expenses can be claimed on tax, and this will differ across jurisdictions. Before planning out your R&D strategy, make yourself aware of what can and cannot be claimed, to make the most of your budget.
To learn about your jurisdiction’s R&D tax incentives, sign up to harness the R&D Masterclass’s courses and programs on R&D practices.
