What is ROI?

Most managers are now asked to justify the decisions they make in terms of a ‘return' to the business. For example, will the business get a better return from an advertising campaign or a PR campaign? So …

What is Return on Investment? (ROI)

ROI is a family of measures that look at what is received in return for an initial investment.

Why is ROI important

Resources are not infinite – so every business and manager has to make decisions about how to use resources available to them. Making the best use of the resources available is actually the key to success in any area, not just business.

Measuring ROI in financial terms is traditionally done in 3 ways. A measure of time, a measure of proportion, and a measure of cash.

1. Payback - Simply put, the time it takes to get back the amount of money originally invested. So if I spend £1000 on a sales promotion, how long does it take until there are enough sales to generate an extra £1000 of gross margin.

2. Rate of Return - This is a percentage figure. It measures how much more than the original amount I will get back, as a percentage of the original amount. For example, if I spend £1000 and get back £2000 the rate of return will be 100%. If I get back £1500, the rate of return will be 50%.

3. Net Present Value - This is a cash figure, and really allows for the fact that getting £1000 in 12 months time is worth less than £1000 now. How much less depends on inflation. There is a standard (if complex) way to calculate this figure. Example: if inflation were 10% per annum, you would need to have £1100 in 12 months time for it to be worth the same as £1000 now.

Companies may make their investment decisions based on any one of these methods, or a combination of all three.

What about non-financial measures?

How can we measure ROI in training, PR, recruitment etc? It still makes sense to talk about ROI, whatever we are investing in. Marketing departments can measure the cost of acquiring, serving and keeping customers. Operations can put a value on the importance of key suppliers.

Once a discussion about the value of a business activity is underway, it is always possible to find some proxy measures that will indicate how fast that activity is improving or declining. It is then possible to make a broad value judgement about the likely return from a specific investment.

Is measuring ROI in training difficult?

You can make it difficult for yourself, or you can get help. There is a great tool to measure ROI on technology projects already available - more in the next issue.

Presenting the ROI

If you are a sales person – you need to be able to present the business case for your offer – which includes the ROI. Someone else may calculate it for you – but you need to be able to have a credible conversation about the results.