How to Calculate the ROI of Your Accounting Software
How to Calculate the ROI of Your Accounting Software
Are you thinking of purchasing accounting solutions, but don’t know if it will be worth it? Here’s our formula to successfully calculate the ROI of your accounting software.
If you’re a business owner, you’re probably aware of how precious your time and resources are. This is doubly true if you’re just starting out, with barely enough time to sleep, let alone do anything else aside from trying to make your business stay afloat. And even if you’re the CEO of a massive conglomerate, we doubt that you made it there by being callous with time and money.
However, if you really think about it, money is a commodity. And, usually, you’ll find different ways to earn back what you spent. Time, on the other hand, is a commodity you can’t get back. This means that as a business owner it would be better to invest in things that would make your company run faster to save time.
Accounting software is a very efficient way to maximise the hours you have in a day. These days, 67% of accountants admits they prefer to make use of cloud accounting. But how do you calculate if your investment will be worth it in the long run?
How to Calculate Return of Investment on Accounting Software
You might think you can calculate the worth of your accounting software just like how you balance out every other investment or venture you have. But that’s not the case. The usual formula for ROI is gains plus costs divided by costs.
Let’s say you purchased stock worth £1000 and sold it a year later for a total of £1,500. Calculating the ROI in formula would be £1,500 - £1,000 = £500 and divide that by another £1000. That would equate to a 0.5, also known as a 50% return on investment.
This means you gained £500 out of your investment, which is 50% of your costs. Pretty straightforward, right? Well, let’s go back to accounting software. Especially if you’re a small to medium-sized business, you will want to know if investing in this software will be worth your while.
A positive number will mean you are gaining money from your investment. So now that you know the formula, can you calculate the ROI for accounting software? Unfortunately, not yet. You need to determine how much you are going to spend on it first.
What’s the Price of Accounting Software?
The price for accounting software varies greatly, from free tools and up to thousands of pounds every month. Naturally, low cost accounting software is highly popular amongst small businesses here in the UK. And, of course, those solutions costing you thousands will be for companies that need a substantial number of log-ins and accounts, and they usually specialise in accounting jobs needed in enterprise-level groups.
You also need to take into account (pun intended) the people who are actually using the software. Depending on what you go with, you would usually have to invest in additional features such as
- Tech setup and support
- Data migration
- Data storage
This might seem daunting when you first hear about it. If you’re an SME, does this mean that the best choice would be a low cost accounting software?
Indeed, there are many brilliant free and low cost software solutions out there. However, many of these tools can come with hidden charges – some have important features locked away until you pay extra for an upgrade, others have storage limitations or only cater to a small number of allowable users. To make matters even more complicated, quite a few of them will be offered in a freemium version without tech support – in other words, you would be on your own.
With this in mind, let’s not focus on the cost of the software but, rather, the value.
Read More: Our Full Review of Xero Accounting Software.
The Value of Accounting Software
The true value of accounting software will depend on how big your business is, the number of transactions you do in a month, as well as how much you’re currently paying for your accounting services. Due to these three variables, it’s difficult to truly put a number on these factors.
However, it isn’t impossible. First, you need to answer a couple of questions:
- How much your accounting services cost?
- How much time is spent on accounting each month?
- How much time can be saved when using accounting software?
For the sake of this article, let’s try to envision a brief scenario. Let’s say you have two employees who are paid £25 an hour each for their accounting services. They work around 10 hours a week, which will equate to 80 hours per month. If we factor in year-end taxes, we could estimate to reach around 1,000 hours a year.
That’s £50,000 you’re spending for accounting services alone. Imagine then that your employees can finish their jobs in half the time if they were to make use of an accounting software. Suddenly, you’re only paying £25,000 a year – with the bonus of a diminished chance of human error.
These variables will obviously vary greatly depending on your company. But, in this case, the financial value of your accounting software is £25,000 every year.
Let’s take our little scenario one step further. Imagine that your accounting software starts at £10 per month for the basic package. If you choose this one, you’ll spend around £120 per year. If you instead were to opt for an annual payment option, that number might decrease even more.
On the other hand, you might choose a premium package that costs around £10,000 a year. Most paid plans offer free tech support, and let’s say you spent £1,000 for training your two employees to use the software. If we used the ROI equation before, that is £25,000 minus £11,000 divided by £11,000, which results in 1.28, or a 128% return on investment. That’s nothing to scoff at.
Get Free Expert Advice on Selecting Accounting Solutions
If you have more employees, the solutions will usually charge more per employee. Even if you crunch the numbers, you’ll usually still save a large amount of money if you make use of accounting software.
Of course, there will always be scenarios where you might end up spending more than you gain. It’s up to you to balance things out and use the formula we provided to see if it’ll be beneficial for you.
Do you find the software market too saturated for you to navigate? We here at Software Advisory Service offer non-chargeable expert advice – and it will all be perfectly tailored to the requirements of your organisation. Get started today by filling out the form to your right. What are you waiting for?
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