How to work out the annualised cost of your software

Add up the price column of a software register and you will get a number. Whether that number means anything depends entirely on whether the prices in it were on the same footing, and in almost no register are they. A few tools bill monthly, a few quarterly, most annually, and one or two were bought outright years ago and have not billed since.

Those figures are not comparable, so a column of them is not a total. Annualising is the step that makes them comparable. It is arithmetic rather than accounting, it takes about a minute per tool, and it is the difference between a spend figure you can rank tools by and one that is merely the sum of a column.

Why a register of mixed cycles cannot be added up

A price means nothing without the period it covers. "40 a month" and "40 a year" are almost the same string in a spreadsheet and a twelvefold difference in what leaves the bank. The billing cycle is the field that carries that period, and it is the one most often left blank, because whoever entered the price knew what it meant at the time.

The damage is not only to the total. It is to every decision made by looking down the column. Sorted by raw price, the cheapest-looking line is frequently the most expensive tool you own, and the tool you would actually cut sits three quarters of the way down where nobody reads. A register that cannot be sorted honestly is a list, not a register.

The conversion

The annualised cost of a tool is its price expressed as a yearly figure, whatever cycle it actually bills on. There are four cases and only one of them is interesting.

• Monthly: multiply by twelve.
• Quarterly: multiply by four.
• Annual: leave it alone.
• One-off: exclude it. A licence bought once for a single payment does not recur, so it contributes nothing to a yearly run rate, however large the payment was.

Four things the annualised total does not tell you

Annualised cost answers one question well and three other questions not at all. Knowing which is which is what stops the figure being quoted in a meeting where it does not apply.

• It is not this year's cash. A tool that renews in November has a different cash position in March to one that renewed in January, and both annualise identically. For the cash question you need renewal dates, not a run rate.
• It is not what you are committed to. A monthly rolling tool and a tool two years into a three-year term can annualise to the same number while one of them can be stopped next month and the other cannot. That is contract liability, and it is worked out from the term and the notice period rather than from the price.
• It assumes today's price holds. Most renewals reprice, and a renewal uplift applies to next year's figure, not this one. An annualised total is a snapshot of the present, not a projection.
• It is not the full cost of the tool. Implementation, support, training and the admin time to run it are all real and none of them are in the subscription line. That is total cost of ownership, and it is the number that decides whether a cheap tool is actually cheap.

The first two of those are the ones that get quoted wrongly most often. If the question is what you can save this year, see how to calculate your SaaS contract liability; if it is what next year costs, see how to forecast software spend.

The three places the arithmetic goes wrong

An annual commitment billed monthly

This is the one that looks like a monthly tool and is not. The cycle describes how you pay; the term describes what you owe. Multiplying the monthly price by twelve gives the right annual figure here, but only by coincidence, and the conclusion people draw from it is wrong: you cannot stop paying next month. Record the term separately, and read what you are actually committing to in a multi-year contract before treating any monthly price as cancellable.

A per-seat price entered as the price

A seat price is a unit price and has to be multiplied by the seat count before it is annualised at all. Entering 12 a month for a tool with 40 seats and annualising it produces 144 for something that costs 5,760. This is the single largest error available in a spend review and it is always in the same direction.

Mixed currencies and inconsistent tax

Two tools priced in different currencies cannot be added at all until one is converted, and a register that mixes tax-inclusive and tax-exclusive figures is out by a fifth on some lines and not others. Pick one convention, usually the price excluding tax in your reporting currency, write it down, and apply it to every row rather than to the rows somebody remembered.

Derive the figure, never type it

The tempting shortcut is a second column holding the annualised figure, typed in beside the price. It works for about a fortnight. From then on there are two numbers that have to agree forever, and they will not: the price changes at a renewal, somebody updates one column, and the register now states two different costs for the same tool with nothing to say which is current.

Store the price as it is billed and the cycle it bills on, and let the annual figure be calculated every time it is read. Then a price change is one edit, the total moves with it, and there is no second number to go stale. The same rule is why a good register records facts rather than results.

What to record so the total is trustworthy

• The price exactly as the vendor bills it, and the currency it is billed in.
• The billing cycle: monthly, quarterly, annual, or a one-off purchase.
• The seat count, where the price is per seat.
• The renewal date and the notice period, because those decide when the figure can change and when you can act on it.

StackTrackr holds those on one record: the cost, its currency, its billing cycle, the seat count, the renewal date and the notice period. It does the annualising for you from the cost and the cycle, so a one-off purchase never inflates a run rate and a monthly price is never quietly compared against an annual one. It does not convert between currencies, so each one is totalled on its own and a figure always means what the contract says. Have a look at what it tracks, or start a free trial and put your ten most expensive tools in it.