Are you looking to buy a new system or software solution and trying to decide if it is worth the investment? Most businesses are either sold by the software’s cool-looking features, or they use intuition. However, in today’s data-driven world, there’s a better way to ensure you make the smartest investment. This is where a cost-benefit analysis comes in.
A cost-benefit analysis helps you weigh the financial impact of a new system by comparing the upfront and ongoing costs with the potential benefits it offers. This allows you to estimate your return on investment (ROI) – essentially, how much value you’ll get back for every dollar you spend.
In this guide, we discuss what makes a great CBA and then explain how our free CBA tool can help you select the right software solution for your business.
So, what makes a strong cost-benefit analysis
As the name suggests, there are two sides to the coin: costs and benefits.
On the cost side, you’ll want to factor in all the expenses associated with the new system, including:
- Direct costs: These are the most straightforward – software licenses, any necessary hardware upgrades, implementation fees, and training costs for your team.
- Indirect costs: These might be less obvious but still important to consider. Think about potential disruptions to your workflow during implementation, data migration needs, and any downtime you might experience.
On the benefits side, the goal is to identify and quantify the new system’s positive impact on your business. This includes:
- Tangible benefits: These are easy-to-measure improvements, like increased revenue, reduced operating costs, or improved efficiency.
- Intangible benefits: These are more qualitative but still valuable. Think about improved employee satisfaction, better decision-making due to more accessible data, and enhanced customer service.
Assigning a dollar value to intangible benefits can be challenging, but a strong CBA will acknowledge them and explain their importance alongside the quantifiable improvements.
Understanding Costs and Benefits of a New System: A Clear Look at your Bottom Line
Now, let’s talk about our Cost vs. Benefit Calculator spreadsheet, a tool designed to help you estimate the value a new ERP or software system can bring to your professional business.
This spreadsheet focuses on four key benefits that can be directly impacted by a new system:
1) Win & Grow Revenue: A new system might help you generate more leads through improved marketing automation, boost your sales conversion rates, or facilitate upselling and cross-selling opportunities. Our resource shows how a small percentage improvement in sales conversion rates impacts your top line. Just plug in your business’s values and estimated improvement in win rate and the tool does the rest.
2) Increased Staff Utilization: Streamlined workflows, automated tasks, and improved data accessibility can free up valuable employee time for strategic thinking, client interaction, or other high-value activities. This improves utilization (sometimes known as chargeability.) We wrote a blog about this some time ago, but our tool shows the value of improving utilization by 1% for businesses with ten chargeable resources.
3) Increased Project/Client Profitability: Better project management tools, improved resource allocation, and more accurate billing can significantly boost profitability for your projects and clients. Plug in your numbers to see how much additional profit your business would make if your new system improves your margins by, say, 5%.
4) Reduced DSO (Days Sales Outstanding): Invoicing efficiency, automated collection processes, and improved client communication can contribute to faster payments and a healthier cash flow. This is also a small financial benefit of reducing DSO in terms of the interest saved on overdrafts and loans.
The spreadsheet also contemplates the costs of implementing the new system, and discounts the costs of systems being replaced. It is important to include these in your calculations to get an accurate estimate of the net benefit to the business.
Ready to take action?
Download our free Cost vs. Benefit Calculator spreadsheet today! The spreadsheet is easy to use – simply input your estimated costs and projected benefits to get a clear picture of the potential return on investment you can expect from your new system.
Investing in a new system is a big decision. Using a cost-benefit analysis and our Cost vs. Benefit Calculator, you can be confident you’re making the right choice for your business.
Remember, we offer a variety of resources to help businesses through the system implementation process – from needs assessment to training and ongoing support.
