ROI on your IT

Mobile technology can increase efficiency, but how do you know if the investment is really worth it for your company?

I suggest the return on investment (ROI) model. Among others, ROI can be measured in terms of revenue increased, costs reduced and time saved. To calculate ROI, the benefit of an investment (the gain minus the cost) is divided by the cost of the investment. The result is expressed as a percentage or a ratio.
 

Assume you purchased a stock for $10. Two years later, you sell it for $14. Using the formula above, the ROI is 40 percent during two years, or a 20 percent annual return. Once you have an ROI calculated, you can use that number to compare this investment to another.

While the above is a simple example, ROI calculations can become complex. This is when careful analysis of the facts and projections come into play. Let’s look at an investment in technology — purchase mobile device hardware and software set-up for your crews and administration.

Here are our assumptions:

• Purchase price: $20,000, totally financed by the bank
• Financing: interest-only payments at 6 percent annual, paid monthly
• Insurance: $1,100 per year.
• Cost savings: $500 per day in labor and office costs
• Depreciation: Seven-year property straight line
• Combined federal and state tax rate: 40 percent
• Net profit: 15 percent
• Other assumptions: no inflation, no tax rate changes and zero maintenance costs.

So, according to my calculations (see table box), the annual return from this $20,000 investment in mobile hardware is more than 57 percent per year. The total ROI is more than 300 percent. Seems like a no-brainer, right?

 

We’ve calculated the tangible financial costs and benefits. But there are intangible benefits that can also be added to the mix. Intangible benefits may be that by using this technology, you can work fewer hours at the office and spend more time with your family. Perhaps using this hardware puts less stress on staff.

How do we quantify these intangibles? The time savings can be calculated assuming a labor rate assigned to how you value your free time. Employee satisfaction and stress reduction are even more difficult to quantify.

The questions don’t stop there. What if the investment gave a negative ROI in terms of cash, but it saved a lot of stress for your staff and office manager? And what if the technology ends up being a distraction to your production teams?

These are decisions that you as the owner must make. There may be times when the financial tangible costs outweigh the benefits but the investment still makes sense because the intangible benefits outweigh the intangible costs. In these cases the analysis is a little more subjective and may call for the inclusion of staff to help examine.

As we move to the future, investment in technology is necessary. But investing in it for investment sake alone is not a prudent strategy. Careful collection of all tangible and intangible costs and benefits must be laid out and a determination made if the benefits truly outweigh the costs.

Daniel is a New Jersey-based CPA. He runs Turfbooks, an accounting firm that serves landscapers. Email him at dgordon@giemedia.com