There has been a lot of talk about benefits a company might get from implementing an FP&A software like planning process optimization, elimination of manual work, valuable insights into data enabling better and faster decision making, improved forecasting accuracy, to name a few.
These claims are good enough to get you interested and start investigating the option of implementing such a tool in your organization. However, when you need to get the budget approval from your board you need to make the case that the purchase of an FP&A tool is not just an expense, rather an investment with the potential to positively impact company performance.
That’s why we decided to create an ROI calculator for FP&A tools. The calculation is split into two main categories: Benefits and Costs. Bear in mind that there are significant benefits that are currently hard to quantify, like employee retention and satisfaction, improved customer and vendor relationship, shifting the role of finance professionals to strategic advisors, and faster and more accurate decision-making for the management.
(Disclaimer) The ROI calculator model is based on various assumptions, either available research on the impact of FP&A tool implementation or our experience from implementing Farseer. If certain assumptions do not apply to your business, or you know their impact is different than the one suggested in the model you will be able to change the values and test different options. Since over 80% of companies use spreadsheets for managing FP&A tasks, the benefits and cost reductions were modeled for a company that currently relies on spreadsheets in this domain.
Business benefits carry the biggest potential impact, but they are also the hardest to quantify. They can vary significantly depending on company size, industry, internal processes, adoption of the tool, and its impact on decision making. In our calculator we split business benefits into three categories:
In the ROI model, you can adjust some of the assumptions to reflect your particular business more accurately.
The importance of demand forecasting
According to EY adopting demand-driven planning and forecasting can generate significant benefits for top-performing consumer product companies - “forecast accuracy can rise by 30-35%, inventory reduces by 20-25% and revenue increase by 3-5%”, similarly, a study by AMR Research found that “a 3% increase in forecast accuracy increases profit margin by 2%”.
With Farseer’s forecasting feature we’ve seen an even higher increase in forecast accuracy when compared to forecasting supported through spreadsheets, but for the sake of keeping the calculator assumptions at the worst-case scenario, we used the 3% increase in forecast accuracy generating a 2% increase in profit margin. Additionally, the calculator assumes that the earliest benefits from increased forecasting accuracy can be expected in H2 of year 1 of the business case.
Data analysis and cost reduction
According to a BARC study, companies that have integrated big data into their business processes managed to reduce their costs by 10%.
While implementation of an FP&A tool isn’t the same as integrating big data, for companies relying on spreadsheets for cost management and planning implementing a unified FP&A solution can still reap significant benefits. Better visibility of cost across the entire company improved the negotiation power with vendors, faster detection of outliers, and a drill-down into cost details enables finance managers a complete insight into costs.
For the calculator, we used the 0.1%, with the commencement of potential savings in H2 in year 1.
Have in mind when testing scenarios in the calculator that both assumptions (profit margin increase and cost reduction through data analysis) have an impact on the cost reduction, with data analysis including the operational costs as well.
According to a report from F1F9 “17% of large businesses have suffered financial loss due to poor spreadsheets and 4% have experienced inaccurate information in spreadsheets more than 30 times in the last 12 months.” Improved security is usually the obvious benefit, and interestingly, the hardest to quantify at a general level.
Some of the questions that come to mind when discussing security and its potential business impact:
“How long can I keep all my plans and forecasts in spreadsheets? How much historical data can be put in before they stop functioning?”
“What is the cost of all my plans and forecasts being unavailable for a few hours/days?”
“How do I define the “stop functioning”? Is a spreadsheet that takes 15 minutes to open still a functional tool?”
“What is the cost of my sales forecast being forwarded to my competitor by a disgruntled employee?”
“How can a mistake in reporting with 150k lower EBITDA impact my business?”
The last example is one we have spotted in our client’s spreadsheets when implementing Farseer. A simple mistake in a formula resulted in the underreporting of EBITDA. Legally such action could be seen as tax evasion and subject to fines and auditing.
In the calculator, we estimated system failure, security breach or data loss could result in a 300k EUR loss with a 2% probability of such an event occurring.
Compared to the first two benefits this category is rather simple to quantify. What we’ve seen so far with our clients is that the finance staff saves approximately 1.5 - 2.5 days a month after the implementation of Farseer. The productivity increase usually comes from eliminating manual tasks like data collection, connecting numerous plans from every department, managing the entire process via email, checking for potential errors, and manual report preparation. To keep the ROI model conservative in the calculator we used 1.5 days a month as an input variable, i.e. 144 hours per year.
What’s missing in the calculator, but should be mentioned, is the satisfaction of the finance professionals of not having to perform menial tasks, and the additional time they can now use for data analysis and strategy, instead of manual data collection.
The same principle is applied to other team members involved in FP&A activities (planners). We assumed an FP&A tool saves them from 1-5 hours a month (in the calculator we used 2 hours/month, i.e. 24 hours/per year). This number can vary greatly depending on the company and position. Generally speaking, these users save time by having past data (plan and actual) available which shortens the time and improves the accuracy of their plans. Top-down planning and automatic forecasting help automate planning for team members with a lot of items to plan (category managers, cost planners, etc.).
In the calculator, you can adjust the average hourly wages and number of users. For both user tiers, we assumed productivity increase will commence in H2 of the first year.
The formula used in the ROI calculator: hours saved per user x average hourly wage x number of users
Costs are quite simple to model, FP&A implementations normally have a one-off implementation fee + licenses. We also included the training users go through as a cost for the company, as well as the hours a smaller team on the client side spends on the implementation.
The license fees for FP&A software are usually split into tiers: admin users, other (business) users, and view only. View-only licenses at Farseer are free, and for the other two tiers, we used industry averages. Have in mind that the license can change greatly depending on the number of users, and this is something clients negotiate with their potential vendors. In our calculator, both admin and other (business) user license prices are fixed.
The formula used in the ROI calculator: number of users x license price
The assumed implementation fee for a mid-market company is set at €40k, this number can vary greatly depending on the company size, complexity of the model, and chosen vendor. Have in mind that large enterprise solutions often 5x the assumed €40k of implementation cost. Building on the implemented model is free of charge with Farseer, meaning you can add new markets, products, companies, or any other category to the model independently and at no additional cost. Systems admins go through modeling training and for all additional questions, clients can always reach out to our customer success team and get help with expanding their model.
The internal cost of implementation and training
The internal cost of implementation and training is calculated through user tiers; finance staff and other users. Average admin training and implementation involvement is one week (i.e. 40 hours) and for other users, it ranges from 1-3 hours (for the calculator we used 2 hours).
The formula used in the ROI calculator: training and implementation hours x average hourly wage of the employee.
Make a copy of the file and follow the instructions on the first sheet. We will update and adjust the ROI calculator periodically with new assumptions regarding the cost and benefit side, so stay tuned!
If you think that your financial models are overgrowing spreadsheets, and you need a better financial modeling tool, you might want to check out Farseer:
- Financial modeling in Farseer is centralized, fast, consistent - you won’t need to worry about errors and mistakes.
- Natural language formulas are intuitive, error-proof and cannot be deleted by accident.
- Sharing and exporting your work is granulated - you can share only parts of your model relevant to your user
- Built-in hierarchy makes modeling transparent by default
- Reorganize models by simply dragging and dropping entire spreadsheets to a specific location in the model
LEARN MORE ABOUT FARSEER HERE