ROI is calculated by dividing the return of the project by its cost, usually over several years. When upgrading your accounting software, it’s likely you’ll carry out this calculation – or at least weigh up the costs and the benefits of the software before making a decision. Of course, to determine ROI you must choose how to measure the benefits and costs of your new software. This process is more complex than it first appears…
What are the costs?
The main costs of your new software appear obvious: the one-off fee or subscription you pay to gain access to the software. However, there are also some indirect software costs, particularly if you opt for software that’s initially free. New hardware, training, hardware maintenance, support and implementation may all cost money. You must also factor the cost of lost time into these calculations. Estimate how much a man-hour is worth to your business, and then how many man-hours you’ll have to spend on software implementation - this is an opportunity cost; the value of the time you lose by choosing to complete a certain task.
Once you have your costs for the initial month, six months, year, three years, and so on, it’s time to start considering the benefits.
Determining the benefits
For accounting software, the benefits are likely to be trickier to estimate than the costs, as many of them will relate to time savings. The benefits you ought to consider in your ROI calculation include:
- Time saved through increased productivity (time spent completing tasks)
- Time saved through reduction in quantity and severity of errors (such as misfiling documents)
- Time and monetary savings due to a more reliable system and improved support offerings
- Money saved on old software costs (where applicable)
- Time saved through reduction in travel (e.g. if you implement cloud software which allows staff to complete tasks through their smartphones).
Strictly speaking, ROI calculations should only include tangible benefits such as those we listed. However, when making a business decision you can include unmeasurable benefits as a separate consideration. These might include improved client satisfaction rates, better user experience (staff satisfaction with the software), and more accurate files and records. It’s extremely difficult to quantify these benefits, so you can’t use them in a ROI calculation – but that doesn’t mean they aren’t important.
Once you’ve carried out the calculation, you’ll be left with a figure that shows you how much value there is to be gained from your decision. Ideally, you should compare this figure with the status quo – there may be extra future costs if you stick with an inefficient software solution. It’s entirely up to you to decide on the acceptable rate of profitability.
A word of caution – ROI calculations certainly aren’t perfect. You will have to make plenty of estimations which may not turn out to be realistic. Additionally, it’s easy to overestimate time savings, particularly for the first few weeks of use.
If you’re carrying out a ROI calculation, you’ll need plenty of information on what the software upgrade process entails. Take a look at Integrity Software’s construction accounting software upgrade guide to find out more.