Those who have been involved in investments for a long time are already aware of ROI and its importance. However, if you see this abbreviation for the first time in your life, a brief explanation of this notion is needed. So ROI (Return of Investment) is a coefficient that shows the profits or losses of any investment. This coefficient helps to estimate the success of a particular investment and therefore to define the further strategy. There is a formula for calculating ROI, which seems to be quite easy, but in reality, people usually face difficulties that lead to incorrect numbers. So let’s figure out the algorithm of ROI calculation together.
In order to calculate the efficiency of the investment, we will start with project costs: both capitalized and non-capitalized. Here you need to specify software licensing costs (capitalized), annual licensing and support, software implementation costs like costs for internal and external services, project management, software installation, the adaptation of interfaces, and training, as well as annual operating costs which are software and hardware support, leasing costs for servers, costs for database licences. Thus, by putting the numbers of all these components, you receive the total investment sum. This step might be difficult in practice, so to make this work lighter for you, it is recommended to use the quotes submitted by providers.
After sorting the investment sum out, we pass to the next and calculate savings. For this purpose, start with defining all the benefits that the project is supposed to be, like automation of manual tasks and other types of optimization. If the estimation of costs is hard, estimation of savings is much harder, as you have to carefully consider activities and potential, foresee both the best and the worst cases. To receive more accurate figures, it is advised to conduct analysis together with your vendor.
All difficulties are over, and now all we need to do is to compare cost and savings. The formula for ROI is the following: entire savings / total amount investments * 100%. If, as a result, you have the figure that exceeds 100, congratulations – the project is worthwhile. It means that if the ROI is, for example, 166%, your investments are fully covered plus you receive 66% of the profit. Similarly, if ROI is 97%, for instance, investment in this project is not beneficial.
Good like with calculation, and may your investment be always profitable!