Whitepaper Calculating Return on Investment (ROI) for your Fixed Asset Management Software Purchase
Real Asset Management
White Paper: Calculating the Return on investment
Real Asset Management
Calculating Return on Investment (ROI) for your Fixed Asset Management Software Purchase Note: The information provided in this document is on an “as is” basis, without any warranty. Real Asset Management International (RAMI) is not responsible for any person’s or entity’s actions with respect to any loss or damage caused, or allegedly caused, directly or indirectly by the information contained in this document.
Fixed Asset Management Software - Defined A fixed asset register is an accounting tool used to store and manage an organization’s list of fixed assets (e.g. computer and office equipment, vehicles, land, buildings, etc.), which typically consists of items held for the purpose of production of goods or performing services, not used for the purpose of sale. Quite simply, a fixed asset register is a detailed list of fixed assets. Fixed asset management is an accounting process used to track fixed assets for the purpose of financial accounting (depreciation). Many companies also elect to track the whereabouts, quantity, condition and maintenance records relating to fixed assets for tax and insurance purposes.
Key Drivers for Implementing a Fixed Asset Solution From a purely operational standpoint, having an accurate asset register that shows location, condition and the responsible contact can help ensure that assets are available and usable when needed. But how a business manages its assets also has multiple effects on the entity’s finances, through the very tangible costs of heightened insurance premiums, property taxes and neglected depreciation. These areas cannot be effectively addressed without a specialist fixed asset management solution. Organizations that are using cumbersome spreadsheets to manage an ever-growing asset register constantly struggle to address a variety of issues surrounding the accountability and traceability of their asset base. The following are just some of the many areas in which businesses, without a comprehensive fixed asset management system, are failing to address:
Corporate governance requirements (SOX, CSOX, US Tax, GAAP, SAS 70, IFRS, etc.) Today, companies of all sizes are subject to increased scrutiny by government agencies and regulatory boards reacting to recent business reports and investor’s requests for higher standards of accountability, transparency and overall corporate behavior. The main goal here is to improve financial management, reporting and corporate governance. With such a high degree of attention focused on your organization, why would you risk the integrity of your financial data by relying solely on spreadsheets? Accurate and effective implementation, management, monitoring and updating can easily be accomplished with a specialist fixed asset management system in place; it’s the only real way to ensure compliance.
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Inaccurate depreciation calculations It is a proven fact that nearly all spreadsheets contain errors, which is to be expected with information entered by hand. Whether it be the background asset data or the formula itself, there’s little doubt that depreciation calculations, when based on a spreadsheet, are likely to be inaccurate. Several people within one accounting department will often access, manage and edit the same spreadsheet, making errors even more likely. A specialist fixed asset management system will eliminate costly depreciation errors. Depreciation formulas and asset lives can be defaulted for each book based on any defined asset category. Processing depreciation this way is both quick and easy, completed with just a click of a button.
Lack of an audit trail and overall security A specialist fixed asset management system will track and record every detail of every action ever made by any user, which is unattainable with spreadsheets. Dates, times and explanations are recorded as well, making it very simple to ensure the security and integrity of your fixed asset data. A specialist system will require a valid username and password combination to enter the system and will enable department heads to define security at an individual level to ensure that confidential information can be viewed only by those that need to see it and safely hidden from those who don’t. In other words, limited access can be set by user in order to restrict read only and editing rights.
Inability to link ‘parent/child’ assets or conduct asset splits, batch disposals, etc. The ability to link ‘parent/child’ assets is key in order to establish hierarchical relationships and dependencies. A specialist fixed asset management system will display such links pictorially in collapsible branches. A typical example of this might be the association between a PC and software license, where the PC is the ‘parent’ and the license assumes the role of the ‘child’. The option to transfer or dispose of the ‘child’ asset will subsequently follow the transfer or disposal of the ‘parent’ asset, keeping the relationship intact. For obvious reasons, spreadsheets are unable to accommodate ‘parent/child’ asset relationships in such a way, making it difficult to accurately track and manage these important hierarchical dependencies. The ability to conduct automated asset splits and batch disposals will provide similar benefits.
Access to multi-currency, multi-lingual or multi-book capabilities If your organization operates in many different countries then multi-currency, multi-lingual and multi-book capabilities are most likely imperative in your fixed asset management procedures. A specialist fixed asset management system will have multi-book capabilities to allow core asset information to be shared across any number of books with different sets of figures, enabling compliance with both local and group depreciation policies. Vital information (such as analysis codes, descriptions, acquisition and capitalization dates, etc.) can remain constant across all books while details like asset life, depreciation rules and residual values can be book dependent. As far as multi-currency capabilities go, a specialist system will allow each accounting book to be independently configured to meet international accounting standards. Within the asset register, each office location should be able to record and report on its own assets in local currency. User-defined exchange rates will allow the parent company to easily view and report on the same values in USD.
Unable to meet historical reporting and forecasting requirements Composing reports and forecasts can be a complicated and daunting process, especially if attempted in a spreadsheet. The data produced is far too important to chance inaccuracies. A specialist fixed asset management system will incorporate standard and customized reporting and forecasting templates to ensure an intuitive method of extracting and analyzing asset data.
Wasted time on tedious tasks such as data entry Entering and maintaining asset data becomes an endless task when working within the parameters of a spreadsheet. A specialist system will automate the entire fixed asset management process. From data import capabilities to automated reports and forecasts, a significant amount of valuable time can be shaved off the entire process.
Lack of confidence in data integrity Total control over your fixed asset management data simply cannot be achieved through the use of a spreadsheet. Whether a user
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input error or unintentional miscalculation, inaccuracies within your fixed asset register are inevitable. With that said, how can you be 100% confident in the integrity of this vital data? A specialist fixed asset management system will have strict security features in place to effortlessly address the issue.
Calculating the Return on Investment (ROI) for a Fixed Asset Management System As all investments should be, fixed asset management software implementation should be analyzed based on the return it will provide to the organization. ROI is a performance measurement used to evaluate the efficiency of an investment. In mathematical terms, it’s the overall benefit of an investment, divided by the actual cost of the investment; a simple calculation expressed as a percentage. ROI calculations make side-byside comparisons very simple, as long as the same components are used to calculate costs.
Studies have shown that due to a lack of confidence in calculating ROI, the majority of companies do not even calculate an ROI before investing in software. Of those that do, it’s often only done at the start of the project to justify spend, and never re-calculated for proper measurement following implementation. In order to calculate the ROI for your fixed asset management software purchase, you must first determine the costs and benefits. To do this, you need a measurable baseline of your current system/procedures for comparison. First, calculate time spent on fixed asset accounting for all duties involved in the process; this should include: 99
Data entry and verification
99
Report generation
99
Accounting events entries (disposals, transfers, etc.) Monthly and yearly book closings
99
Journal postings
99
Conducting physical inventories
Second, subtract costs associated with your current fixed asset management procedures from actual costs associated with Asset4000; this will leave you with a component of the benefit. When calculating costs, be sure to include all costs involved and not just those associated with the actual software. You may want to consider the following: 99
Salaries and benefits of employees involved in the project (daily or hourly, depending on project scope).
99
Employee overhead, i.e. supplies and equipment.
99
Direct costs, T&E, third parties, etc.
99
Lost opportunities; did the person on this project suffer a loss, i.e. potential sales?
The above costs should be calculated for all periods from initial project discovery to ‘Go Live’ date, then going forward when necessary.
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Example ROI Calculation for ABC Company Facts: 99
2,500 Assets
99
GBV = $2,500,000 (average asset cost = $1,000)
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NBV = $1,250,000
Calculation of Benefits: Current Scenario Accountant I spends 25 hours per month manually entering data into an AccessÂŽ database, generating basic reports, and processing transfers and disposals on a monthly basis. Based on a total, yearly salary of $65,000 (includes benefits and overhead costs), divided by 2080 total working hours per year, the hourly cost works out to around $32.00.
Annual cost for Accountant I = $9,600 ($32.00 X 25 hours X 12 months) Accountant II spends 30 hours per month performing asset splits and more complex accounting events, producing depreciation calculations, posting to the G/L, closing books and generating senior management reports on a monthly basis. Based on a total, yearly salary of $80,000 (includes benefits and overhead costs), divided by 2080 total working hours per year, the hourly cost works out to around $39.00.
Annual cost for Accountant II = $14,040 ($39.00 X 30 hours X 12 months) ABC Company has not conducted a complete physical audit in four years. Two members of the maintenance department and two members of the IT department performed the last physical audit. The inventory audit was completed with pencil and paper over a two-day period; total costs came to $2,000. During that two-day period, the IT helpdesk and maintenance work order support fell behind schedule.
Current Total Costs = $25,640 ($9,600 + $14,040 + $2,000) Proposed Scenario ABC Company’s new fixed asset and inventory tracking software provides a built-in link to its e-Procurement system, eliminating data entry time for Accountant I. The new system’s built-in report writer generates reports quickly and easily. Transfers and disposals are also completed with the click of a mouse, generating a full audit trail. Time spent on these tasks is dramatically reduced by 60 percent.
Accountant I costs lowered to = $3,840 ($9,600 - 60% or $5,760) Accountant II also realizes significant time savings since assets splits and other complex accounting events are also now completed quickly and easily. Calculating and posting depreciation and closing books can now be accomplished with a few clicks of a mouse. Senior management reports that previously required research and pivot tables are now just the push of a button away. Time spent on these tasks is dramatically reduced by 60 percent.
Accountant II costs lowered to = $5,616 ($14,040 - 60% or $8,424) With Track4000, accurate physical audits are completed in no time at all, typically in about 65 percent less time than it takes with pen and paper.
Total Audit Cost = $700 ($2,000 - 65% or $1,300)
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Proposed Total Costs = $10,156 ($3,840 + $5,616 + $700) Total Benefits: $15,484 ($25,640 - $10,156) ••• Furthermore, after completing its latest physical audit, ABC Company was unable to locate 10 percent of its assets; refer to the company facts above.
Cost of ghost assets = $250,000 (250 X $1,000) Writing off the NBV associated with the ghost assets on the register, assuming a 39 percent corporate tax rate, results in a significant tax overpayment.
Income tax overpayment = $48,750 (39% of $125,000) At a five percent property tax rate, the property tax overpayment is significant as well.
Property tax overpayment = $6,250 (5% of $125,000) Lastly, at $.01 for every $1.00 of assets, there is a hefty insurance premium overpayment.
Insurance premium overpayment = $1,250 ($.01 X $125,000) Total Overpayment (Tax + Insurance) = $56,250 ($48,750 + $6,250 + $1,250) Total Benefits ++ Tax and Insurance Savings: $71,734 ($56,250 + $15,484) ••• New Project Costs Actual project costs include the fixed asset tracking software plus installation, configuration, training and two years of annual maintenance and support.
Actual project costs = $20,000 Additional project costs include planning, research, analysis, selection, approval and purchase; this is based on a total of 80 hours and an average hourly rate of $42.00.
Additional Project costs = $3,360 (80 X $42.00) Total New Project costs = $23,360 ($20,000 + $3,360) •••
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Results:
ROI (Excluding Tax and Insurance Savings) = $15,484 / $23,360 = 66% ROI (Including Tax and Insurance Savings) = $71,734 / $23,360 = 307% Payback = 1.5 Years Payback (Including Tax and Insurance Savings) = 4 Months
Cash Flows
Year 1
Year 2
Labor Costs
15,484
16,258
Tax & Insurance
56,250
7,500
$71,734
23,758
$21,260
$0
Savings
Total Savings Investment Project Costs Annual Support
$2,100
$2,205
Total Investment
$23,360
$2,205
Cash Flow Totals
$48,374
$21,533 Labor Costs & Annual Support are based on an annual increase of 5%
Summary If you are looking to justify the implementation of a fixed asset management system, take some time to detail the deficiencies in your current processes and utilize the template above to calculate ROI for the project. This is a beneficial exercise for organizations in any stage of the fixed asset management software review process. Fixed asset management is critical to the fiscal health of all operations; frequent and effective fixed asset management processes could potentially save your organization hundreds of thousands of dollars a year.
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