How to calculate the financial cost of downtime
September 10th, 2018
It’s concerning how few businesses understand how much downtime costs, be it for an hour, a week or a day.
Fortunately, understanding these costs at a notepad level is easy and having the figures on hand allows you to make measured business decisions about how much to spend to improve your operations and to mitigate risks.
Many businesses assume they could survive with a day’s worth of downtime. However, they don’t factor in the true cost in terms of lost revenue and fixed costs, such as salaries and utilities.
Here are some basic calculations to help you work out how much downtime would actually cost your business.
How to calculate lost revenue to downtime
Often, when calculating the cost of an IT outage or other disaster, businesses will just look at their fixed costs such as the cost per hour of staff. However, the real cost comes from the lost earnings and revenue. The calculation is simple at a basic level:
As an example, if your business usually makes £200,000 per week over 40 working hours, a single hour’s outage will result in a loss of £5,000. That would be £40,000 a day.
Of course, the type of business is a factor. If it’s a law firm, you’re likely looking at the flat calculation above. If you’re an estate agency you may still be able to operate for a few days as your diary and contacts have been synchronised to local devices. However, you will be losing money regardless of if you can scrape by.
How to calculate fixed costs
During an outage you can’t send your employees home without pay, nor can you just skip the building’s rent for that day. In many business sectors, a serious IT outage will impact a large percentage of the workforce. A few will be fighting fires, but many will be idle and this is where the bulk of fixed costs will come from.
A simple calculation for fixed costs is:
As an example, if you have 50 staff and on average they are paid £20 an hour you’d be losing £1,000 an hour. That would be £8,000 for a day’s outage.
If you use the figures above, you’d be losing £6,000 an hour for a business turning over ~£10 million. Although the calculations are basic, they give insight into the fundamental costs which is enough to start informing your decision-making process regarding business continuity and disaster recovery.
You’d also need to look at other areas where you’d lose money – you could have reputational damage, recovery costs, etc. But it’s unlikely that you’d need to go into such detail to make measured decisions on how you’re going to control the areas of risks within your business.
You can certainly dive deeper and look at the cost per individual IT system, as these calculations are a good starting point to understand what you need to – and should be – doing to protect your business.
Thanks to the rapid development in technology and the ever-decreasing costs, controlling these risks for a sensible cost is a reality. A £10 million business should be able to protect their IT systems for the cost of a few hours downtime or less.