R&D: Which companies spend the most on it and how do they set their budgets right?

R&D (Research and Development) is an important activity undertaken by ASX-listed companies of all kinds. This is most prominent in respect of health and technology stocks, but even established companies in other sectors do it as well.

In FY23, ASX-listed companies spent $14.7bn in total – data for FY24 is not yet avaliable. Yet FY23’s total was actually over 25% lower than the $20bn spent in FY22.

But how do companies decide how much to spend on it and which companies tend to be the biggest spenders?

 

How companies set R&D budgets

Companies set their R&D budgets based on a variety of factors. The most important factor is to strategically align the budget with the company’s long-term strategic objectives.

Companies will consider how much they have already invested in R&D and if an increase in investment is necessary to achieve their goals.

Companies also factor in market trends, competitive analysis and internal capabilities when assessing the need for additional funding. Additionally, they look at what resources are available and the return on investment expected from those resources.

 

Just how much?

The specific amount allocated to R&D ultimately depends on how funds are allocated across the entire company.

Companies typically allocate a percentage of total operating expenses to R&D projects, which is typically between 1% and 10%.

The exact percentage will depend upon the size of the company and its sector. Larger companies tend to invest more in R&D, while companies with limited resources may only allocate a small portion of their budget due to lack of resources or financial constraints.

Often times, smaller companies will partner with other organisations or seek government grants for their research initiatives in order to maximise their R&D budget allocations and/or any tax benefits.

In order for companies to get the most out of their research investments, they focus on projects that have maximum potential return on investment (ROI).

It’s important that companies conduct adequate market research before investing heavily in any single project so as not to waste valuable resources on something that won’t bring increased revenue or improved customer satisfaction.

Additionally, companies should ensure that they follow best practices when it comes to executing their research initiatives, such as conducting experiments and collecting data in a manner that can be easily analysed by stakeholders.

Finally, organisations should always evaluate current results against initial goals set so that adjustments can be made as needed for future projects.

 

R&D tax offsets

R&D tax offsets are government-sponsored incentives that are designed to encourage businesses to invest in research and development (R&D) activities.

This type of incentive is meant to stimulate innovation, allowing businesses to explore new ideas without the fear of high financial risk. For pre-revenue companies, it can mean they won’t have to undertake dilutive capital raisings.

The main R&D tax offset is a refundable tax offset which allows eligible companies to claim a tax refund for up to 45 per cent of their eligible R&D expenditure.

This would be limited to certain types of projects – those that satisfy the definition of ‘core research and development’ under the Income Tax Assessment Act 1997 (ITAA97).

Other eligible projects might include activities related to product testing, technical problem solving, or experimentation.

Companies can also claim a non-refundable tax offset for up to 40% of their above the line R&D expenditure.

Additionally, there are several other forms of assistance available through state and federal governments in Australia including grants, concessional financing, access to facilities and personnel resources, advice on intellectual property protection and more.

 

Which companies spend the most on R&D?

Amongst ASX companies, the two sectors that will tend to be big spenders are health and technology companies.

This is because they tend to be commercialising (or aspiring to commercialise) new technologies. It is important that they can beat the market by having a superior product.

Once they have that product out on the market, it is important to maintain their competitive advantage and/or strengthen it to avoid losing ground to competitors.

 

Keep an eye on it

A company’s R&D spending is worth keeping an eye on.

A company may be spending too much or too little. Alternatively, it may not be getting the outcomes desired from the spending.

But remember that no two companies are alike and what is a sufficient level for one company may not be the right amount for another. What’s most important is that it is making money (profits specifically) or perhaps is on the right path towards making money.

 

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