Not Your Grandfather’s ROI Anytime you decide to evaluate a business project or venture, the term ROI will undoubtedly arise. If it doesn’t, make sure you bring it into the conversation. While it’s certainly not the only point of analysis, it is an important one. ROI, at its Core ROI – Return on investment –
Not Your Grandfather's ROI
Anytime you decide to evaluate a business project or venture, the term ROI will undoubtedly arise. If it doesn’t, make sure you bring it into the conversation. While it’s certainly not the only point of analysis, it is an important one.
ROI, at its Core
ROI – Return on investment – is one of the most commonly used tools for project analysis and is relatively easy to calculate. Simply put, it is the profit (return) on your project divided by the total cost of implementing that project, multiplied by 100, giving you a percentage ROI. That’s it. Very unassuming…unless you want it to be useful.
While the actual ROI calculation itself is easily defined, determining the value of the component inputs is generally more involved. And, it should be if the resulting ROI is going to hold water and be analytically valuable. Luckily, involved doesn’t have to mean difficult, but it does mean involved.
If ROI is going to be used to evaluate a project’s potential and to decide if that project is worthwhile, you really need to do your homework researching applicable, up-to-date market trends, considering how those trends apply to your (well-defined) target market, and being totally honest with yourself with regard to the true earnings potential of the venture. You also have to be thorough with your assessment of the costs of the project. You need to go beyond the direct costs of materials and labour, and include realistic estimates of the sales and marketing efforts that will be required, as well as other operating and overhead costs that the project will incur, especially when those costs are not shared with any other revenue generating activities. For example, if you need to rent a building solely for the purpose of bringing your project to life, the revenue from that project will need to be sufficient enough to cover the entirety of that rent expense, so that expense should be factored into your ROI calculation.
If your ROI calculation is being used to determine the success of a project after it has been completed (post mortem analysis), or if a specified amount of time has elapsed and an interim ROI evaluation is needed, then you have the advantage of hindsight and the availability of the project’s actual financial information for the ROI calculation. Interim ROI evaluation is one of the many points in time where having a strong Accounting function really shows its value (measured as weight in gold, FYI). When you have organized, readily available financial information, both post mortem and interim ROI valuations become plug and play formulas that can be used to quickly evaluate your project against original expectations and, in the case of interim ROI analysis, to help determine a project’s fate. Is it performing well, poorly, or somewhere in between? Should we continue as is, make changes, or pull the plug? Enabling a business to accurately and efficiently perform important ROI analysis and make these types of critical decisions in real time is the super power of great information.
Wait. I thought ROI was a calculation? You know – quantitative. For the analysis of purely financial investments (stocks, bonds, bitcoin), I agree. Quantitative, it is.
But, when we’re talking about a business, project, or venture that involves a person’s own blood, sweat, tears, and soul – an investment in yourself – how can that ROI ever be truly measured by numbers alone? Rhetorical question. It can’t be. This is where I propose that ROI should get qualitative.
What if we considered ourselves as data points that must factor into the decision to launch a new project, or discontinue a business line? As a business owner, or potential business owner, you should value your thoughts, opinions, mental capacity, and financial comfort level at least as much as a number produced from other numbers. I’m not suggesting that you throw common sense aside and connect yourself to a venture that is destined to fail based on reasonable financial analysis. I am instead advocating that you ADD your whole self into that return on investment analysis.
We all want to be successful and generate great returns on a passion project. But, maybe that project requires a lot of your focus and mental energy that you can’t afford to give right now. Would moving forward with it in your current reality really be worth long term damage to your mental health? On the other hand, maybe a project’s financial model forecasts only a 5% return on your dollars spent, but it is the perfect venture to allow you to rebuild your confidence and positively direct your creative energy. Are you going to pass on that opportunity to build your self-equity only because it won’t make “enough” profit?
Undoubtedly, ROI is a very important metric. It only makes sense that we add ourselves to the equation.
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