No matter how do you invest, but it's important to understand the way of spending money, as well as how quickly they generate the revenue. The efficiency of investments is a critical parameter of the project budget.
This article is about how to calculate the planned return from an IT project.
This article is the adequate representation of such concepts as:
|* Income is money a business receives in exchange after providing a product\ service or through investing capital.||* Profit - the amount of money, earned in trade or business after paying the production costs and selling goods or services;|
|* Expenses - the amount of money needed or used to do/buy something;||* Return on investment: the profit from an activity for a particular period compared with the amount funded in it;|
|* Profitability: the condition when a company receives a profit;||* Project cost: design cost + development cost + cost of support/improvements + payments for components and services + advertising and promotion costs.|
Cost of development
Calculating the cost of development always saves money and time.
Cost of development = design price + development price + active support + price of components and services + advertising and promotion
The CEO of the company approached us with a call-centre of 10 employees. The businessman was going to replace the call-centre personnel with a chat-bot.
How he conducted the calculations:
- The salary of each employee was 700 $;
- The expenses to cover - 10 employees*10 months = 70 000 $;
- The client assumed that for 10 months the chat-bot would have paid back the costs of its creation.
We accepted the client's request and conducted our calculations. Understanding his business nature, we concluded that this bot would not pay off. At least for the time that the client is counting on.
The client did not take into account a few nuances that would significantly affect the costs:
- Some customers are going to continue to make phone calls because they want to talk to a person;
- The chat-bot system needs some time for the implementation and debugging;
- It is necessary to take into account the costs of supporting and paying for the platform.
If you consider all charges for 10 months, all costs are going to increase by 8,000 US dollars (from 70 thousand dollars to 78 thousand US dollars). It is impossible to recoup the project for 10 months, and its feasibility in the long term requires detailed calculations since we expected only a short-term perspective.
Principles of increasing profits through the implementation of an IT project
The reduction in staff can be a solution, the replacement of highly skilled employees with system operators, diminishing training, advertising, promotion costs. How to calculate the return: calculate the difference between costs before and after the implementation of the project, this is the return on investment.
You can reach the effectiveness of the work in this way: we do the same, but more, better, faster. Increase the processing speed of applications, and the number of satisfied customers raises. Moreover, the number of positive feedbacks increases, as well as the customer pool. For example, if 1 operator processes 10 people with a net profit of $ 50, instruct the operator to process more bids (15 people), and you receive $ 75. How to calculate the return: compare the difference between income before and after the project.
Increase in income
Direct and indirect sales include the introduction of Internet sales, sales of licenses and subscriptions (direct sales), advertising, sales of leads (indirect sales). How to calculate the return: forecast the sales taking into account the realized project, and calculate the difference between the net profit before and after the project implementation - this is the return on investment.
Calculating the effectiveness of an IT project
Evaluation of the effectiveness of investment projects in the field of information technology, no different from any other sphere. The most relevant way to do this is to calculate profitability.
Profitability is a general indicator of the economic efficiency of an enterprise or the use of capital and resources.
The profitability of the project is a financial indicator of the effectiveness of investments in the business.
You can calculate the profitability of the project using a universal formula:
P = profit / revenue.
Concerning the IT project, the variable "type of profit" is the actual return from the project, and "the indicator whose profitability you need to calculate" is the cost of the project. Thus, the formula becomes:
P = (Project return / Total project cost) * 100%
The result depicts the amount of income that you receive after the project implementation, for each monetary unit invested in the project. You can compare these results with other investment projects from a similar sphere. The minimum level of profitability does not exist; the value is positive if it is higher than the deposit rate and alternative projects.
* Deposit rate - the percentage of the amount of the deposit that you receive on condition of investment.
An example of calculating the effectiveness of an IT investment project
Suppose there is a company that sells services for $ 0.5 million per year. We calculate the profitability of the implementation of CRM. Thanks to automation, the efficiency of employees would grow, and gross income would rise by 10%.
The initial data are as follows:
- The total cost of the project, including development, implementation, support, payment of the platform - $ 40 thousand;
- Return from the project - 10% of the increase to gross income (from $ 500 thousand), this is $ 50 thousand.
We use the data in the formula:
P = (50 thousand $ / 40 thousand $) * 100% = 125%.
Want to independently calculate the profitability of the project in a couple of clicks? We created a calculator for the profitability of an IT project specifically for you to count.