ROI or return of investment refers to the measuring of the performance of an investment. In a way it is a means of measuring the profits derived from the capital used in order to produce it. The term and the idea have long been used in the business and corporate world for measuring variables and how profitable a plan might be. The recent changes in the world economy and how business is done in general is making most people think twice about the validity of the old definitions of ROI.
The Purpose of the Measurement
This method of measurement is used in order to determine whether an undertaking for a company is going to be profitable. Each project would cost something, which is the investment. That undertaking is done in the hopes of somehow boosting the sales or the profit of the company. Here are some examples of investment and how they can be profitable for a company
- A new ad campaign for example would draw in more customers.
- New and better machines could speed up the production process and make it more efficient.
- The training of managers and employees could make them more efficient and increase their productivity.
If a company would be able to measure the ROI of a certain undertaking, then they can decide if it is going to be worth it. If the number of new customers that a new and costly ad campaign can draw in would be minimal, then it wouldn’t be worth it to mount the campaign.
Calculating the ROI
Here is the formula for coming up with the ROI:
ROI (%) = Net Profit / Investment × 100
There can be complications in calculating the ROI. This is especially true in cases where the investment is in the form of properties and real estate. It’s a little harder to compute for ROI when there is mortgage involved.
A Fresh Look at ROI
There are also certain changes now that has made the concept of ROI obsolete and sometimes invalid. This is especially true when the investment comes in the form of training personnel and managers. The problem now is that training with the aid of the internet or e-learning is not something that is done in one session. It is done over time continuously. Its cost is therefore not a one-shot dea,l but a continuous thing as well. It makes computing for the ROI of such training harder.