If you’re considering transforming your company’s accounts payables, you have to justify the expenditures. With any transformation project, finance and treasury teams must estimate an expected ROI, or return on investment.
You can opt for a number of different metrics such as net present value and internal rate of return, but a recent article by Treasury and Risk tells us why the analysis of a project’s ROI is the best tool for finance initiatives.
“Treasury and finance teams that make ROI analysis a standard component of their business case process are setting themselves up to achieve more successful transformation projects,” the article states.
ROI is a cash flow metric that allows executives to make an informed decision about whether to proceed with your project. It provides them with various scenarios to help them pick the best approach. So how exactly do you make a project ROI calculation? Here’s the simple version that Treasury and Risk provides us:
(Anticipated gain - Estimated Cost) / Estimated Cost
There are two primary inputs: the anticipated cash flows for the expected benefits of the project and the anticipated costs.
It’s important to be realistic about a project’s benefits. For example, if you’re automating the manual processes of AP, is it realistic to expect that you’ll be able to reduce the manpower currently dedicated to those jobs? Most benefits of treasury projects come from staff reductions due to automation, fee reduction due to consolidation of banking relationships and increased working capital due to strategic payables management.
On the cost side, a project is likely to involve a one-time expense to acquire a software package, vendor charges, and fees regarding implementation, integration, management, and staff training.
You’ll be happy to hear that for technology-related initiatives, project risk tends to be low. Most vendor solutions, such as supplier financing, have straightforward, quantifiable costs to implement and mature forecasting for projected benefits. This makes it easy to compare your current practice to industry best practices and generate a close estimate of the overall cost and expected benefit.
ROI analysis is an excellent tool to determine whether a project is justified to commence. Although a solid ROI analysis is a challenge to pull off, it’s one that is well worth the effort.