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Return On Investment (ROI) management is a method of assessing profits made on financial investments made by a company. ROI, also known as Rate Of Return (ROR), determines the ratio of an investment with its profit. It can be computed with a formula by first subtracting the amount invested from the amount earned to obtain the return. The return or benefit is then divided by the amount invested to obtain the ROI.
A company can use ROI management to measure opportunities by means of a metric. An opportunity with low costs and high returns will yield a higher ROI than one with high costs and low returns. Such a formula allows management to calculate the risks of investment with a measure applicable to all investments, which can allow an objective assessment.
Breaking down potential investments to figures for the sake of ROI management requires that the company be able to make total cost predictions with reasonable accuracy. It must also be able to compute for the projected revenue that investments will earn. Studying previous similar investments allows the company to make educated estimates, and avoid erroneous figures which might otherwise lead to skewed calculations. This can be challenging when dealing with variable factors such as number of sales made or the impact that might be made by a new competitor on the scene.
ROI management should be balanced with knowledge earned from past experience. Reducing potential investments to figures makes it easy to compare one opportunity to another, but the formula does not take all factors into account. By default, it does not affix values for certain gains that could be made, including brand awareness, customer base growth, earning the goodwill of suppliers, or time invested. The company must still take these elements into consideration before making a decision on an investment.
Once the decision has been made to proceed with an investment, the company must then document all aspects of the process in order to allow for benchmarking. Benchmarking is the procedure of comparing the business's performance against the best that the industry has to offer, with the usual measuring points being cost, quality, and time invested. It is important for ROI management to measure the returns of the company's investments against the best ones from other businesses, as well as good past investments by the company in question. Doing so can allow the company to judge whether too much or too little reliance is being placed on the formula, whether certain factors are not being computed to the detriment of the company's profitability, and ultimately whether a change in the decision-making process is needed.
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