As your company grows, you will need to invest a good deal of your revenue to keep operations from falling into complacency. To determine the most advantageous investments, conducting a proactive ROI analysis of priority projects can help you anticipate every aspect of a potential project. Let’s take a look at the variables of an ROI analysis.
First, gather your receipts (or estimates) and create a detailed cost analysis of the project, breaking the costs down into separate categories. The category breakdown will be helpful when you start to assess the different costs, and how those investments make a huge difference when trying to determine the viability of a project.
To configure this, you will want to start with the single-project costs. These include:
- Supplies & materials
- Power & fuel
- Subcontractor services
Once the costs have been firmly reported, it is time to start looking at the potential benefits of the proposed projects.
Since we are only looking at calculating the ROI of a particular investment, we should talk about how your IT investments may benefit your company. They include:
- Increased Revenue – New revenue streams increase the worth of the organization and make it easier for a company to adjust if the market shifts.
- Cost Reduction – You know what they say: You’ve gotta spend money to make money. Investments aimed at strategically reducing recurring costs can be some of the most valuable investments you can make.
- Capital Reduction – Much like a cost reduction, a capital reduction actually eliminates the large capital expenses that can really hamstring an organization’s operational budget.
- Cost Avoidance – Investments designed to eliminate bottlenecks, downtime, and other financial drains through improved technology.
- Capital Avoidance – It’s hard to get more efficient than eliminating one of your costs entirely. Investments in automation can bring with it a great deal of capital avoidance.
The equation to calculate the return on investment for your technology is the same as it would be for any other investment:
ROI = (Benefit)/Cost
All you need to do is take your total benefit (calculated by subtracting your costs from your ultimate gains) and divide it by your total costs. This gives you a simple metric that makes your benefits easy to understand, and enables you to make comparisons much more easily.
You should also keep a few other qualifications in mind as you plan your next IT investments.
- What departments in your organization will be affected by any new project investment?
- How will these new investments impact their jobs?
- Are you focused more on seeing an ROI that’s financially quantifiable, or are you more concerned with less tangible, qualifiable benefits?
- What – if anything – could potentially go wrong during the implementation of your IT improvements?
Machado Consulting can help you decide what your best moves are concerning your information technology. Reach out to us at (508) 453-4700 to learn more.