Worked Costings and Selection Checklists
Does an ERP pay for itself? A payback worked example using efficiency savings
How to estimate ERP savings honestly, net them against higher running costs, and calculate payback, including a post-go-live productivity dip. Illustrative figures.
An ERP pays for itself when the net annual savings it creates (staff time freed, errors avoided, old systems retired, minus any increase in running costs) add up to more than the one-off cost of getting it in place. Payback in years is the upfront cost divided by those net savings, adjusted for how savings grow and for the slow first months after go-live. In practice, many small and mid-sized business projects take several years to pay back, and some never do in pure cost terms; the case then rests on growth, control or risk reduction. This worked example shows the method with invented figures.
This guide is part of the ERP selection checklist series and uses the one-off cost of Option B from the TCO worked example.
Step 1: list the savings you can defend
Only count savings you could explain to your accountant or bank. Separate cash savings (money that stops leaving the business) from time savings (hours that are only valuable if they are redeployed or avoid a hire).
| Saving | How it is measured | Illustrative annual value |
|---|---|---|
| Accounts payable data entry | 10 hours a week saved × 48 weeks × $55 an hour loaded cost | $26,400 |
| Faster month-end close | 4 days saved a month × 12 × 8 hours × $75 an hour | $28,800 |
| Fewer stock write-offs and mis-picks | Reduction in write-offs from stock records | $10,000 |
| Retired apps and spreadsheets tools | Old subscriptions cancelled | $6,000 |
| Gross annual saving | $71,200 |
"Loaded cost" means wages plus super, payroll tax where it applies, leave and overheads. The hourly figures above are illustrative.
Be sceptical of savings that depend on everyone using the system perfectly from day one, and of "soft" benefits such as better decisions unless you can tie them to a measurable result.
Step 2: subtract higher running costs
The new ERP usually costs more to run than the old accounting package. In this example:
- New recurring cost in year one: $51,180
- Current recurring cost of the old system and apps: $18,000
- Increase: $33,180
Net annual saving = $71,200 − $33,180 = $38,020.
Step 3: calculate payback
Net upfront cost is $177,800 (implementation, migration, integrations, training, contingency and internal time). Assume net savings grow 3% a year as volumes increase.
| Year | Net saving | Cumulative |
|---|---|---|
| 1 | $38,020 | $38,020 |
| 2 | $39,161 | $77,181 |
| 3 | $40,335 | $117,516 |
| 4 | $41,546 | $159,062 |
| 5 | $42,792 | $201,854 |
After four years $159,062 has been recovered; the remaining $18,738 is recovered in about 0.44 of year five. Payback is about 4.4 years, and the net benefit over five years is $201,854 − $177,800 ≈ $24,050.
You can reproduce this in the payback calculator by entering $177,800 as the cost, $38,020 as the annual saving, 3% growth and a five-year horizon.
Step 4: allow for the go-live dip
Productivity commonly drops for some months after go-live while staff learn new screens and fix data issues. Suppose year-one savings are only half the estimate: $19,010.
| Year | Net saving | Cumulative |
|---|---|---|
| 1 | $19,010 | $19,010 |
| 2 | $39,161 | $58,171 |
| 3 | $40,335 | $98,506 |
| 4 | $41,546 | $140,052 |
| 5 | $42,792 | $182,844 |
Payback stretches to about 4.9 years and the five-year net benefit falls to about $5,040. A modest change in one assumption has nearly erased the financial case over five years, so the decision now depends on benefits beyond cost.
Step 5: decide what else counts
If pure payback is marginal, consider whether the ERP:
- avoids a hire as the business grows (for example, an extra accounts clerk at an illustrative loaded cost of $75,000 a year);
- reduces risk, such as payroll and Payday Super errors, BAS mistakes or stock fraud;
- enables growth, such as a second warehouse, e-commerce or an acquisition;
- replaces a system that is reaching end of support, making some spend unavoidable.
Write these down separately rather than inflating the savings table.
Ways to improve payback
- Phase the modules so you do not pay for unused licences (what ERP covers).
- Right-size user types: light licences where possible.
- Negotiate a renewal cap so running costs do not rise faster than savings; see the renewal uplift example.
- Invest in training, which protects the savings.
- Check government support: the federal Digital Solutions program under the Australian Small Business Advisory Services initiative has offered subsidised or free advice on business software; at the time of writing it provides advice rather than cash grants. Check business.gov.au for current state and federal programs, which change frequently.
Tax deductions and the instant asset write-off can change after-tax cash flows; see the tax treatment guide.
Frequently asked questions
What is a good payback period for an ERP?
There is no standard. Many businesses look for payback within the expected life of the system, often five to seven years, alongside non-financial benefits.
Should I count time saved if nobody leaves?
Only if the time is used for something valuable, such as handling growth without hiring or improving collections. Otherwise it is not a cash saving.
How do I measure savings after go-live?
Record baseline measures before the project: hours on key tasks, days to close, stock accuracy, error rates. Measure the same things six and twelve months after go-live.
Does the calculator include tax?
No. It compares pre-tax amounts. After-tax payback depends on how the costs and savings are taxed.
Sources
- business.gov.au — grants and programs finder, including digital advisory services
- Treasury — small business programs announced in the Budget
- Australian Taxation Office — deductions for business expenses
