What is ROI?
When someone in business talks about their ROI, they mean their Return On Investment. A savvy business person will want to know all about the ROI of a project, because it tells him or her how successful it is. ROI is usually a matter of simple mathematics, although it can involve a number of different factors. Any expense that a company has can be calculated in terms of ROI. Some expenses may not have any direct ROI, or their ROI might be zero. Buying a new stapler, replacing a broken printer, or repainting a room doesn’t produce any revenue, so these expenses don’t have any ROI. For this reason, ROI is not customarily used to discuss these types of expenses, even thought they could be considered investments in the company. A more common use for ROI might be something like an ad campaign. Buying ad space in a newspaper, hiring a graphic designer to create the ad, and paying a photographer to take pictures of your product all cost money. This is your investment in the ad campaign. In or
ROI (Return On Investment): Vendors Promise It, Management Demands It, What Is It? Definitions Abound — You might find these definitions in a finance or economics textbook: A measure of a corporation’s profitability, equal to a fiscal year’s income divided by common stock and preferred stock equity plus long-term debt. A calculation of the return (earnings) as a percentage of the assets employed (investment). These definitions may be accurate; but, they are not helpful to most people. What Most Decision-Makers Really Want to Know When people ask “Whats the projects ROI?” what they are really asking is: Is this project worth the money we will spend? Are the returns (benefits) greater than the costs? In other words, they want to know the value of an investment before they decide to spend time and money. Three Ways People Measure ITs Value There are many ways to measure a projects value. Three of the most common financial measures (or metrics) are: Payback Period (PP) Net Present Value (
