No one wants to waste money, we all want to spend our money smartly.
But very often, to make money you need to spend money.
Investing in your business is necessary to grow. And in today’s day in age, one of the most effective tools for growing your business is using software to automate the menial parts of your business.
Yet, it can be very hard to understand the return that software will generate for you.
So how can you feel confident that you’re spending your money smartly, that your investment will give you a good ROI?
I’ll help show you the process of calculating how to figure out your projected ROI by running through an example with you, going through it step by step.
First, lets run through the scenario.
Bob has a distribution company which currently takes orders from their customers by phone and manually enter them into a computer. Being that this is clearly an outdated process, Bob is considering to build a website which can -handle order entry -check the customers available payment terms -pull inventory update -push orders into his existing ERP.
He speaks to a developer, who estimates the upfront cost will be $33,100 to create a website with the features needed to get started. Proposal is as follows:
Additionally the developer advises him that there will be costs in maintaining the website.
For the upcoming years, an estimated $1,000/year for hosting based on their volume and a budget of $12,000/year for bug fixes and site enhancements, (as he gathers real data into how his customers interact with the site) for a total of $13,000/year. To sum up: Upfront cost of $33,100 Yearly site maintenance of $13,000
Bob wants to know how much money this website will actually save his business, so he goes through his process to see how much manually entering customer orders costs him in labor.
He comes to these conclusions:
His company receives on an average day, 50 orders.
To process one order takes around 15 minutes.
Which means that 750 minutes a day are spent manually placing orders (50 orders X 15 minutes an order = 750 minutes)
Now he has to figure out how much each minute of work is costing him.
The employee that inputs order is paid $15 an hour/ $15 for 60 minutes.
That means every minute of work costs $0.25. ($15 divided by 60 minutes = $0.25 a minute) So if 750 minutes a day are spent on orders, that means it will cost him $187.50 a day on labor (750 minutes X $0.25 = $187.50) Let’s round it to $187, to keep this simple.
Now, considering his company is open normal business days-261 days a year, that would be a total of $48,807 a year spent on order entry. (261 days X $187 a day on labor = $48,807) So now Bob knows how much he is spending on order entry annually.
The next step he must find out is how much of the labor will the website take care of, thereby removing the need, and costs, for manual labor.
He speaks to his employee, and being that there are customers who have questions or difficulties and that some customers would rather order by phone, he estimates that a website will cut down manual order entry by 60%.
That would come out to $29,284 saved a year in labor year. (60% of $48,807 spent a year on manual labor = $29,284)
Bob now has a very defined figure of how much a website can save him a year.
He can now figure out how much money the website will save him, equaling his return on investment. Let’s try it out over 4 years.
|Year||Investment||Savings On Labor||Total Profit||ROI|
How to calculate ROI Bob can now feel confident about his investment.
He can confidently predict that he will save over $29,000 a year on costs.
Over 4 years that would equal $117,448 saved on labor costs, and being that over those same 4 years it would only cost him $72,100 for the website, that equals a total savings of $45,348.
A total 63% Return On Investment over 4 years, including an expected 125% ROI for the foreseeable future.
Of course every situation is different, so you won’t have this exact scenario, but the process is the same.
The important point is to look at creating software as an investment to accomplish something specific.
Like in the above example, Bob was looking to have his software, -handle order entry -check the customers available payment terms -pull inventory update -push orders into his existing ERP.
And then he was able to calculate how much value a software that could accomplish this for his business would be worth.
To follow the above process, you obviously need a quote for the cost of the project.
But you can actually do it without a quote. Just follow steps 1 and 2, and then calculate how much the software is worth to your business. Meaning, in the example above, the costs in labor that the software was able to take over were $29,362 annually. So Bob can decide how much it’s worth it to him to invest into this software. (Of course he also has to factor in the non-quantitative gains like a better customer experience, etc.)
Which means that before you ever call a developer, you can calculate how much it’s worth for your business to invest in the project. The process would look like this:
Simple. I hope this helped simplify how to view an investment into software, and help you calculate if it is worth it for you.
If you need more help using software to grow your business I’d be happy to help!
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