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What’s the ROI of an Automated Payroll System?

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Automating your payroll processes will result in both saved time and money – but how do you calculate that into a return on your automation investment? In this episode, Curt talks about how to determine the ROI when you’re purchasing software for payroll automation.

OK, so we’re talking about the return on investment from automating payroll data collection with respects to time tracking and timesheets. It’s pretty exciting stuff.

The American Payroll Association did a study a few years ago that showed there’s a one to either percent error rate for manual data entry for time collection for payroll automation. What does that mean? So, best case is one percent of your data that’s entered into the system is wrong when you’re doing things manually. So let’s say you’ve got 100 engineers in a closet, and you’re paying them all hourly, $50 an hour – so $100,000 a year. That’s $10 million a year for the whole company for the payroll. OK? Just to make things simple. One percent of that is $100,000. Let’s say, of that one percent error rate, half the time you underpaid them, and they came back and said “Hey, fix that” so you did. Of course, that’s expensive to do the fixing and all of that. And then half of the time, you overpaid them and they never said anything about it, because that’s certainly a possibility, even for really honest engineers. Maybe they just didn’t notice when you overpaid them. And maybe you overpaid them by just a little bit, so let’s say that 0.1% of your annual payroll is lost in terms of overpaying people and not getting the money back. That would be $10,000 out of your $10 million annual payroll. So right away, the benefit from automating the time collection for payroll automation is $10,000. And…so you can afford to pay $5,000 a year to automate payroll for these 100 people. You’d have a 100 percent return on investment. You’d be spending $5,000 a year to automate this thing and you’d be getting $10,000 in benefit a year. And that doesn’t count the value from automating data around vacation tracking and approvals, and workflow and all that sort of stuff. And it also doesn’t count the ROI you would get from billing your customers and getting the money faster, which is enormous. And especially, the most important one would be project accounting which is where all the really important ROI is, because project accounting data allows you to understand where you’re profitable and where you’re not. And that makes your company more effective. But back to the payroll thing. You get a pretty good-sized benefit – $10,000 a year benefit – out of automating payroll for these hundred people.

So the question is: how are you doing it now? How many mistakes are being made? How much time and effort and energy are your accounting people putting into doing all this stuff, and how accurate are they doing it? How many mistakes are being made and do you have any idea? Those are all just estimates, they’re extremely conservative, and I think you should probably get on the stick right now and go save some money.