When you are looking to find your ROI or Return on Investment, you need to know first what an ROI is.  An ROI is a traditional financial way of measuring your investment return based on historic data.  It is simple way to figure out if your investment will have a positive or negative ROI or if there are other ways of bringing in a higher ROI.  It is just one of several approaches to building a solid financial case whether or not to make a financial decision based on comparing expected gains to the investment costs.  

The ROI can be improved by reducing costs, increasing gains, or accelerating gains.  However ROI’s can also be manipulated in order to make an investment look better than it actually is, so although it is simple and flexible, it can also be used to make something look better than it actually is.  

To calculate a monetary ROI you first need to identify the total financial benefit of your organization.  Then you must subtract the total investment that is put into the organization such as advertising and marketing.  Anything used to develop the organization should be brought into the total investment.  It is difficult to always measure all of the costs associated with your business so you first need to make sure that you have a very specific plan as to where all your money has been allocated to as well as exactly how much you have taken in.  

Here is the actual figure in which you use to calculate your ROI:

                (total benefit - total costs) = ____           X 100 = ROI
                             total costs

Your total benefits include money saved by the organization, all financial profits, and anything that brings more money to the bottom line.  Your total costs include the obvious such as development costs, advertising costs, and marketing costs.  Your not so obvious costs are program materials, training, overhead of employees, as well as numerous other costs that you have put into your business.  

Simple ROI is the most frequently used for of the ROI because it is the most understood.  With simple ROI the incremental gains from the investment are divided by the total costs.  This simple ROI works extremely well in situations where both the gains and the costs are easily known.  Obviously if you are comparing many different types of investments you may come out with a higher ROI on one then the other.  This would be your better choice when it comes to ROI.  The return on investment metric itself really doesn’t say anything about the magnitude of returns or risks in the investment so you have to consider everything and not just the final ROI number.  

In a larger organization it may not be as easy to match specific returns such as increased profits with the actual costs.  This makes the ROI number less trustworthy as a final decision in choosing which investment your company should be dealing with.  Simple ROI also has become less trustworthy as the cost figures of certain businesses include allocated or indirect costs which may n
ot be caused directly by the action or the investment.  However, it is still the primary tool to use to give you a good idea or understanding of how your investment will work.  Generally it is a correct method as long as you understand everything that is involved in the total costs as well as the total investment.  

The most important factor in figuring out an ROI that works for you is to make sure that you take into consideration the financial consequences aren’t just for one fiscal or budgeted year.  Often business investments extend for several years or more, in which case the metric only has valuable meaning if the time period is clearly stated.  Shorter or longer time periods may give you vastly different numbers for the same investment.  

One of the biggest challenges when doing an ROI analysis is finding and quantifying business benefits.  There are the benefits such as improved morale of the employees or customer satisfaction that sounds great, but when put on paper they are impossible to quantify in financial terms.  Depending on what your company is investing the money in and for might be hard to put into numbers.  Since costs savings are the easiest ways to quantify, too many of the ROI’s fall into the trap of relying entirely on costs to justify investments.  

All financial benefits come from either lowering costs or increasing your revenue but you need to be able to quantify these benefits.  You can do so by looking in these six categories:

•    Increasing sales to get more revenue
•    Increasing productivity with more revenue and cost savings
•    Reducing operational costs
•    Improving customer satisfaction with possible cost savings
•    The cost savings of improving safety
•    Enhancing competitiveness which equals more revenue

You have to look to see if that particular benefit is tangible.  You can’t just look at customer satisfaction, you have to look at how much more sales it can bring in if you have customer satisfaction.  You also have to take into consideration the potential of the benefit if it is fully received.  If the potential revenue far surpasses what the investment is then you already know you are on the right track.  

Finally you have to look at the certainty of the company to receive the benefit.  There are no guarantees that any investment you make will give you added benefits.  For example, if you invest $100,000 in advertising costs, there is no saying that it will actually bring you more business, or enough business to cover the cost of the investment.  

Cost savings are the easiest benefit to quantify when evaluating productivity and potential revenue improvements but you need to consider the value that can be generated by extra productivity first.  It is often larger than the cost savings approach.  That simply means that although your ROI might look great, you could stand to make just as much if you choose to implement a cost savings approach.  Make sure before you rely on your ROI that you look at the whole picture and not just numbers that were put together by a simple metric system.


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