Accounting software is vital for most businesses. Whether you’re a solo entrepreneur running an online business or a leader of a sprawling multinational corporation, accounting software is an immensely helpful tool for recording transactions, managing cash flow and understanding the financial trends that drive your business’s profitability.
Accountants understand as well as anyone how costs and profits fit together. Before making an investment in purchasing accounting software or upgrading an existing solution, it’s key to understand the potential benefits and costs.
What is ROI?
Return on investment (ROI) is a common financial metric used to evaluate and compare investments. It tells you how much gross profit your investment generated or may generate in relation to the original investment. If your business is considering changes to equipment, location or accounting software, for example, ROI is a useful tool in measuring the potential payoff.
Business owners, managers and executives often use ROI because it is versatile and easy to use and understand. It’s versatile because it can be used to gauge the profitability of any investment, regardless of the size or nature of the expenditure. And after it’s calculated, it’s easy to understand because if an investment returns a profit, it’s likely a worthwhile endeavor, unless there are investments with higher ROIs available. There are other important financial metrics to consider when making big decisions, but understanding ROI, or potential ROI for a project in planning, is often a central part of evaluating new projects or investments.
How to Calculate the ROI of Accounting Software
Any investment or effort can have an ROI associated with it. And although the types of investments can vary widely — from real estate to the stock market and can be for personal or business use — the approach to calculating ROI is the same. Here's what you need to know.
How to Calculate ROI
The most common formula for calculating ROI is:
ROI = [(Current value of investment – cost of investment) / cost of investment] x 100
To get a better idea of how it works, here's an example. Let's say a mid-sized accounting department is considering upgrading to new accounting software. The IT manager expects the software will cost $50,000 to install, migrate data and train the team. After in-depth analysis, it’s estimated that the savings will be about $5,000 per month. The savings will come by reducing server maintenance and automating data entry, invoicing and spreadsheet tasks.
At the end of the first year, the ROI would be:
ROI = (($60,000 - $50,000) / $50,000) x 100
= ($10,000 / $50,000) x 100
= .2 x 100
In this example, the company would enjoy a 20% ROI at the end of the first year and additional savings well into the future. That's a good ROI, and the business should seriously consider the upgrade. In some cases, it may take too long for an investment to pay off for it to be a viable option, or it may even have a negative ROI. Running scenario planning to get a better understanding of potential outcomes can add nuance to your ROI forecasts and help you make a more informed decision.
How Much Does Accounting Software Cost?
Accounting software prices range based on various factors, including whether it’s on-premises or cloud based, how many users you need to access it and what features you would like to include. The most robust accounting software is part of enterprise resource planning (ERP) platforms that integrate financial software with payroll, supply chain and other modules.
Small Businesses: Many small businesses start by trying to manage their finances with Excel spreadsheets. But even a basic accounting software program can help generate invoices, track expenses and perform other essential tasks. Expect to pay about $100 per month, depending on your needs. Note, that these solutions lack much of the functionality of more robust solutions like workflows, customizable dashboards and integration with other business software, so the low price point may be deceiving.
Growing Small and Mid-Sized Businesses: Businesses with growing long-term accounting needs should consider a robust cloud accounting software package. This gives you many additional features. Financial management software includes dynamic general ledgers, automated accounts payable and receivable management and tools for taxes, fixed assets, cash management and other accounting needs. This type of software has more complex pricing, depending on your business's needs, but usually starts at $999 per year with a $99 user license fee for the cloud-based solution.
Mid-Sized to Large Enterprises: Mid-sized to large businesses have complex accounting needs, as well as concerns like compliance with multiple regulatory agencies. Ideally, large enterprises should use an accounting module that’s part of a larger ERP. For example, NetSuite ERP includes modules for accounting, financial planning and many other needs. This adds efficiency and security to your company’s most trusted data. Expect to spend tens of thousands of dollars per year, or more, depending on your company’s unique needs.
What is the Value of Accounting Software?
Organizations should look at the value of any major investment, including accounting software, before making a purchase.
Accounting software can help you save on many accounting-related costs and could even help you turn your accounting team into a revenue-generating department that contributes to your bottom line. Here are many common ways businesses realize value from accounting software.
More efficient payroll: Accounting software that integrates with payroll software makes running payroll regularly much quicker and easier for your team. The payroll software calculates taxes and withholdings and can even manage complex commission and bonus structures with ease.
Lower payment management costs: Robust cloud-based accounting software typically includes the tools you need to handle accounts payable (AP) and accounts receivable (AR) from one digital environment. Automated invoicing and payment reconciliations, among other features, cut the time your staff needs to spend on these tasks that can be time consuming and are prone to errors without the aid of accounting software.
Lower IT cost: Old self-hosted accounting systems require expensive servers and IT staff to keep them up and running. Cloud accounting software stores your accounting data in secure data centers with redundant backups, so you don't have to pay for those yourself.
Improved financial reporting: Accounting software and accounting ERP modules include the ability to produce dozens of insightful financial reports. You can typically add customized and automated scheduled reports to improve your managerial and financial accounting reports further.
Cash flow optimization: Payment, treasury and banking features give your treasury team fine-tuned control over cash flow. With accounting software, you can speed up cash inflow by sending digital invoices and providing electronic processing to make it easier for customers to pay their bills. And you can schedule payments to vendors so you can hold onto cash longer, without having to worry about late payments. If you have regular customers, you can also set up automatic invoicing, which cuts down on manual tasks.
Calculating the ROI of Accounting Software
Let’s use the ROI formula and some of the potential cost savings as an example to calculate potential ROI for accounting software. A hypothetical bicycle part manufacturer we’ll call Bill’s Bikes is considering upgrading from a basic accounting program and Excel tracking to a robust accounting software system. The accounting team takes a look at their current system and potential savings and possible increased revenue from a more advanced system and outlines the following.
The below example, while fictional, shows how the ROI would be calculated.
Potential cost savings/improved revenue per month
- Avoided late fees due to delinquent bills: $200
- Eliminated payroll processing software fee: $500
- Savings realized from sending accurate invoices: $250
- Improved revenue realized from sending on-time invoices and providing digital payment options: $250
Total savings per month: $1,200
Total annual savings: $14,400
If we estimate we have a $1,000 annual fee, plus a $100 per month per user fee, and we need to have five users, we can use the ROI formula to see if upgrading to an advanced accounting software program makes financial sense for Bill’s Bikes. Below, we use a simplified version of the ROI formula.
ROI = (Net return on investment / cost of investment) x 100
Total annual savings = $14,400
Total annual costs = ($500 per month for five user licenses x 12 months) + $1,000 annual fee = $7,0000
ROI = (($14,400 – $7,000) / $7,000) x 100
= 1.06 x 100
= 106%With an ROI of 106%, this is a smart investment for Bill’s Bikes. After the investment is made, the team can monitor financial performance and regularly assess the ROI, as well as other opportunities for software investments and the optimal number of licenses.
Free ROI of Accounting Software Calculator Template
If you want a little help getting started, we put together a free accounting software return on investment calculator. Just plug in your estimated up-front cost, annual cost and annual savings or revenue and the calculator will take care of the rest.ROI of Accounting Software Calculator Template
Choosing the Right Accounting Software for the Job
Accounting software helps you better understand and track the flow of money and your company's financial position. While the specific features vary by vendor, it’s used to record transactions, create reports, invoice customers and track account balances, among other things.
Accounting software can help your business run more efficiently by better managing your company’s money and monitoring cash inflow and outflow. Before making a decision on which software solution to purchase, it’s important to understand potential ROI on the software. But you have to look at the whole picture, and not just a simple monthly charge. Your company may benefit from robust accounting platforms that automates processes, connects with other areas of your company — including payroll, customer relationship management and others — and brings all your data together so it’s stored in one single digital environment.
Start by identifying potential areas of savings and where you could improve processes. For example, if accountants are spending time manually generating reports or entering redundant data into separate systems, that’s time lost that could be spent performing other tasks. Look at your AP and AR departments and processes. Are invoices being paid late? Or even too early? And are customer payments lagging, slowing the cash flow to your business or not being paid at all?
After doing a thorough examination of potential savings, try to put a dollar amount to each area of potential savings and compare that to the price for accounting software. Just as with any major investment, ROI can be an important tool before moving forward. And if you make the decision to purchase robust accounting software, continually monitor its performance and what returns come from it.
Whether you’re a manufacturer, wholesaler, retailer or service provider, accounting software can help you understand where your income comes from, where it goes and how much profit is generated. And robust ERP software can connect your accounting and financial data with other key areas of your business to help deepen your insight into financial data, work from a single source of truth and connect data from disparate areas of your business into one digital ecosystem.
ROI on Accounting Software FAQs
How do you calculate ROI on software?
You can calculate the ROI on software with the return-on-investment formula. Calculate your estimated net savings or revenue and divide by the estimated cost to find the ROI.
What is a good ROI for software?
Software often delivers a high ROI as it requires a relatively low cost and can work while you and your employees are asleep or busy with other value-added tasks. You may find ERP software pays for itself many times over.
What is ROI in accounting terms?
ROI is an acronym for return on investment. Accountants and financial analysts often use ROI to compare the profit potential of various business investments or evaluate past investments' performance.
How do you calculate ROI over a period?
To calculate the ROI over a period of time, you will need to estimate the net profit and the total cost from the investment. Understand that occasionally investments may have a high up-front cost but eventually pay dividends.