How to Calculate ROI for your ERP Investment

Investing in an ERP system is a big decision, but how do you measure its return? Here’s a structured way to calculate ROI using an example. 

𝟏. 𝐈𝐝𝐞𝐧𝐭𝐢𝐟𝐲 𝐓𝐚𝐧𝐠𝐢𝐛𝐥𝐞 𝐂𝐨𝐬𝐭 𝐒𝐚𝐯𝐢𝐧𝐠𝐬

ERP helps reduce costs in key areas: Lower inventory carrying costs, Reduced labor expenses, IT and procurement efficiency gains

𝐄𝐱𝐚𝐦𝐩𝐥𝐞 𝐀𝐧𝐧𝐮𝐚𝐥 𝐒𝐚𝐯𝐢𝐧𝐠𝐬:

𝐈𝐧𝐯𝐞𝐧𝐭𝐨𝐫𝐲: ৳22,000,000

𝐋𝐚𝐛𝐨𝐫: ৳16,500,000

𝐈𝐓: ৳11,000,000

𝐏𝐫𝐨𝐜𝐮𝐫𝐞𝐦𝐞𝐧𝐭: ৳5,500,000

𝐎𝐭𝐡𝐞𝐫 𝐞𝐟𝐟𝐢𝐜𝐢𝐞𝐧𝐜𝐢𝐞𝐬: ৳11,000,000

𝐓𝐨𝐭𝐚𝐥 𝐀𝐧𝐧𝐮𝐚𝐥 𝐒𝐚𝐯𝐢𝐧𝐠𝐬: ৳66,000,000

𝟐. 𝐌𝐞𝐚𝐬𝐮𝐫𝐞 𝐈𝐧𝐭𝐚𝐧𝐠𝐢𝐛𝐥𝐞 𝐁𝐞𝐧𝐞𝐟𝐢𝐭𝐬

These improvements may not have a direct monetary value but improve efficiency:

𝐇𝐢𝐠𝐡𝐞𝐫 𝐨𝐧-𝐭𝐢𝐦𝐞 𝐝𝐞𝐥𝐢𝐯𝐞𝐫𝐢𝐞𝐬 →better customer retention

𝐅𝐚𝐬𝐭𝐞𝐫 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐜𝐥𝐨𝐬𝐞 𝐭𝐢𝐦𝐞 → quicker decision-making

𝐒𝐡𝐨𝐫𝐭𝐞𝐫 𝐨𝐫𝐝𝐞𝐫 𝐟𝐮𝐥𝐟𝐢𝐥𝐥𝐦𝐞𝐧𝐭 𝐭𝐢𝐦𝐞 → increased revenue potential

𝟑. 𝐃𝐞𝐭𝐞𝐫𝐦𝐢𝐧𝐞 𝐄𝐑𝐏 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭

Your ERP costs will likely include:

𝐒𝐨𝐟𝐭𝐰𝐚𝐫𝐞 𝐥𝐢𝐜𝐞𝐧𝐬𝐞𝐬: ৳33,000,000

𝐈𝐦𝐩𝐥𝐞𝐦𝐞𝐧𝐭𝐚𝐭𝐢𝐨𝐧 & 𝐭𝐫𝐚𝐢𝐧𝐢𝐧𝐠: ৳55,000,000

𝐏𝐫𝐨𝐣𝐞𝐜𝐭 𝐦𝐚𝐧𝐚𝐠𝐞𝐦𝐞𝐧𝐭 & 𝐜𝐡𝐚𝐧𝐠𝐞 𝐦𝐚𝐧𝐚𝐠𝐞𝐦𝐞𝐧𝐭: ৳16,500,000

𝐌𝐢𝐬𝐜𝐞𝐥𝐥𝐚𝐧𝐞𝐨𝐮𝐬 𝐜𝐨𝐬𝐭𝐬: ৳5,500,000

𝐓𝐨𝐭𝐚𝐥 𝐄𝐑𝐏 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭: ৳110,000,000

𝟒. 𝐂𝐚𝐥𝐜𝐮𝐥𝐚𝐭𝐞 𝐑𝐎𝐈

Let's use this simple formula:

𝑅𝑂𝐼 (%) = (𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑣𝑖𝑛𝑔𝑠 / 𝑇𝑜𝑡𝑎𝑙 𝐸𝑅𝑃 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡) × 100

𝐑𝐎𝐈 = (66,000,000 / 110,000,000) × 100 = 60%

A 60% ROI means the ERP system delivers strong financial value.

𝟓. 𝐋𝐞𝐭'𝐬 𝐔𝐬𝐞 𝐍𝐏𝐕 𝐟𝐨𝐫 𝐚 𝐌𝐨𝐫𝐞 𝐀𝐜𝐜𝐮𝐫𝐚𝐭𝐞 𝐕𝐢𝐞𝐰

ROI doesn’t factor in the time value of money. The Net Present Value (NPV) formula accounts for future cash flows:

𝐍𝐏𝐕 = Σ [ 𝐑_𝐭 / (𝟏 + 𝐫)^𝐭 ] - 𝐂

𝐖𝐡𝐞𝐫𝐞:

𝐑_𝐭 = Net savings in year t

𝐫 = Discount rate (cost of capital)

𝐭 = Year number

𝐂 = Initial ERP investment

If 𝐍𝐏𝐕 > 𝟎, the ERP investment makes financial sense.

Assuming a 10% discount rate and a 5-year projection, if NPV is positive, the investment is justified.

𝟔. 𝐂𝐚𝐥𝐜𝐮𝐥𝐚𝐭𝐞 𝐭𝐡𝐞 𝐏𝐚𝐲𝐛𝐚𝐜𝐤 𝐏𝐞𝐫𝐢𝐨𝐝

𝐏𝐚𝐲𝐛𝐚𝐜𝐤 𝐏𝐞𝐫𝐢𝐨𝐝 = Total Investment / Annual Savings

𝐏𝐚𝐲𝐛𝐚𝐜𝐤 = 110,000,000 / 66,000,000 = 1.67 years

The company recoups its ERP investment in 1 year and 8 months.

𝐅𝐢𝐧𝐚𝐥 𝐓𝐚𝐤𝐞𝐚𝐰𝐚𝐲𝐬

ROI measures immediate financial benefits.

NPV accounts for long-term value creation.

Payback period helps assess risk.

An ERP isn’t just an expense—it’s an investment in business growth.