ROI – Return On Investment – Is A Comparison Tool
For use when you cannot afford it all – it was developed in the 1920s by DuPont to help analyze and compare opportunities for investments – to try to predict which would have the greatest Financial Return – over some, but the same, time period. To keep variables equal.
And of course – the Financial Return – is only one type of Return – and isn’t always the determining factor in the final analysis.
If ROI is to be done it should be done BEFORE making the investment – not just after the fact. If it is even done after the fact – which it was not created to do – be careful of what is determined/learned by that assessment. THAT is part of the misunderstanding by some in our field.
Again, it was intended to compare multiple alternative opportunities BEFORE the Investment was made – to help pick which opportunities to pursue and which to forego. It was intended to be somewhat predictive – but not absolutely predictive.
It was meant to keep the variables the same when looking at the opportunity choices. To keep the cost of capital the same – so that you couldn’t use a lower factor for the opportunity you wanted to push – when I used a higher number for the opportunity I wished to push. And to keep the time period the same. A 400% return over 4 years isn’t the same as a 400% return over 2 years.
The intent was to minimize or eliminate those games that people play.
“Actual ROI” is probably a misnomer – as unless the investment and returns from the opportunity was so simple and clear cut you can’t really account for them all.
So unless your ROI calculations accounted for EVERYTHING – it won’t be actual. For example did you account for every penny spent on time, materials and overhead accurately? For any lost opportunity costs?
What I was taught back in the early 1980s was that “all of the Investment Costs” needed to be compared and contrasted to “doing nothing at all” to get an actual ROI. That’s tough sledding, as they say.
At best the After-the-Fact ROI should be looked at not as an absolute – but to gather insights on how to be more accurate in future ROI prognostications. An After Action Review approach, if you will. THAT is the appropriate use of ROI in looking backwards, after the fact. Too many times it is used as a gotcha.
The Dupont Model for ROI Analysis
Originally developed by DuPont, this ROI model is now in worldwide use. It’s a fast, convenient financial measure that helps executives understand the relationships among profit, sales, and total assets.
And while we’re at it – the DuPont model also addresses ROE.
Not the misguided Return on Expectations version – but the original, real Return on Equity version.
Read more about that ROE – here.
For More on ROI
From The Balance:
Please Learn the Language of Business
So that if you ever “get to the table” – you won’t embarrass yourself and L&D.
That reflects poorly on all of us.
And we seem to be misunderstood badly enough by our Stakeholders – without inadvertently adding to it.
Improve Your Crowd.
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