How to Calculate the ROI of Accounting Software
Calculating the ROI of accounting software helps small business owners truly appreciate the value that it brings to their organization. As a business owner, it’s important to manage your resources properly.
The basic formula for a healthy and successful company is the same. Let’s start with sharing the most important rule. The most common mistake entrepreneurs make is underestimating the value of their most crucial resource: time. It’s too easy to focus on making money by working day and night, sacrificing friends, family, sleep, and your health.
However, as many seasoned businesspeople will tell you, chaotic ensues if you fail to be organized and value time above all else. Money is a commodity that can be earned back when it’s spent. Time, on the other hand, cannot ever be earned back. Every “wasted” minute is just that: wasted. This essentially means that, in the long run, a company will be more profitable when you invest in what makes your work easier and faster.
One such tool is online accounting software. A small business owner is rarely proficient in finances and accounting. This is why it can take up a lot of time to complete all the work properly. It shouldn’t surprise you that most SMEs aren’t comfortable with accounting. Moreover, there’s always the risk of making errors and not being up-to-date with the latest regulations on taxes. These can lead to many unnecessary complications that will cost you a lot of time to deal with. No wonder that most small businesses prefer to use cloud-based accounting software.
Understanding the price of accounting software
The general formula for calculating return on investment is:
Gains – Costs/Costs * 100%
This is read as gains minus costs divided by costs times 100%. For example, if you purchase inventory for $500 and later sell it for $1000, you’re ROI will be 100%. However, in the case of intangible products like accounting software, it’s not as straightforward.
First of all, the price of accounting tools varies greatly (from free to up to several thousand dollars per month). The price also depends on many factors: the features you’re getting, the pricing plan you choose, the number of users, etc. There are also some other costs to take into account including employee training, maintenance, data storage, file migration, and tech support.
If you’re thinking, “Well, why not simply use the free tools?”, again, it’s not that simple. While there are some great, free accounting tools out there, all of them have some forms of limitations, hidden fees, and no advanced features. Other downsides to free accounting software are limits on features, storage and the number of users, no technical support, no onboarding, and more. Yes, the cost of the tool may be free, but in the end, if it doesn’t help you save time and improve your processes, you aren’t getting much return on investment out of it.
The value of accounting software
Even when you solely focus on the most accessible calculations, you will see that cloud-based accounting software saves you money. For instance, assume you’re paying $25 per hour for outside accounting services. If using software saves you just two hours of work per week, you’re looking at $2400 annual savings.
However, the true value is much, much higher. ROI calculations require you to determine the following three variables for your business:
- How much do you pay for accounting services?
- The amount of time you (and your team) spend each month on accounting
- How much time could save each month with accounting software?
Suppose you have three people handling your accounting tasks: Annie, Bill, and Charlie. Their combined hourly wage is $60 per hour. To figure out how much time they spend on accounting using traditional methods like a spreadsheet and pen and paper, you may want to use a time tracking software.
Once you’ve got this, you’ll need an accounting tool. Most market-leading cloud-based accounting software vendors like QuickBooks and Zoho Books offer a free trial ranging from 14 to 30 days. You can plug in your numbers later, but for the sake of our example let’s take some average values. Let’s say it takes the three accountants around 8 hours each, per week, to keep all accounting-related tasks in order. That’s a total of 96 hours per month or $69,000 annually for your accounting needs.
Now, use all the handy features of cloud-based accounting software like automated and recurring billing and invoicing, payables and receivables, expense tracking, tax management, and payrolls. Along with being up-to-date with any tax regulatory changes for your area, assume the team can manage everything in a total of 12 hours, instead of 24 hours.
This way, you’re looking at $35,000 savings on accounting tasks per year. Let’s now include the accounting costs we mentioned above.
Calculating the ROI of Accounting Software
By calculating the value of accounting software, you can determine your gains. Let’s figure out the rest and calculate the ROI of accounting software.
FreshBooks, one of the leading cloud-based accounting software providers, starts at $15 per month with the Lite package. Also, they charge $10 per additional team member. However, since the Lite plan doesn’t offer all of the time-saving features, let’s look at the Plus plan at $25/month. This cost comes to $900/year.
Also, let’s assume that the whole team needs training on how to use the tool at an additional $1,500. FreshBooks offers free technical support for all their packages, so no costs here. Also, you’ll need to migrate data, set-up storage, and all that stuff. Let’s assume that a whole month, which is insanely long, will be required to take care of all these tasks.
Let’s assume that you’ll need to hire freelance accountants to help you keep up with the accounting tasks for the first month. This will help with the transition from manual accounting to software-based, since the three employees are extremely busy with learning the tool and migrating data. We can assume $12,000 should be a reasonable estimate. Adding it all up, you’re looking at $14,400 costs for the first year of using your new accounting software.
Now that we have all the variables, let’s calculate the ROI of accounting software:
Formula – Gains – costs/costs * 100%
This is translated as formula minus gains minus costs divided by costs times 100%. So our calculation looks like this:
$35,000-$14,400/$14,400 * 100% = 143% ROI.
Even with our estimated calculations and the worst-case scenarios, you still get a 143% return on investment for the first year. This will increase even further in the following years (with the exclusion of data migration and training fees). The extra cash can be used to improve many aspects of your business. The extra time per team member can be used to work on product development and strategy, marketing campaigns, or any other thing that you find essential for success.
Now, this is what we call a profitable investment.
The example above is a simple return on investment calculation. Many factors will affect it in both short and long terms including employee motivation, tax regulation changes, and even inflation. However, the bottom line is that cloud-based accounting software can save your business time and money. Moreover, these savings will increase as your team becomes more accustomed to the tool, leading to even better results.