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How to Define your Exact Returns on Investment

Mar 07 2011

Return_on_Investment_Analysis_Graph

Returns on investment or ROI is a commonly heard term in conversations nowadays. Any effort in terms of time and money must yield returns. If taken literally, ROI is the benefit or return that accrues on an investment divided by the cost incurred on that investment. However, most time ROI crops up when one expects some returns for the effort put in.

Everyone will want a return on their investment, but few will make the effort to define exactly what the return must be. Many even expect returns which are phenomenally high, and entirely unjustified. However, for returns to be evident, it is important to first clearly define ROI to be able to see them. ROI could be the cash benefit of upgrading a particular technology in your manufacturing process. It could be the competitive edge gained over competitors by “going green”. Or it could mean reaping economies of scale from large scale production. The idea is to be aware of what to expect, to be able to see it clearly or measure it as a ROI.

A simple example of ROI in the case of document management systems, will include paper costs being reduced, less storage space and lesser amounts of ink being used. These include the tangible ROI, but an intangible set of returns cannot be ignored. These include secondary benefits like becoming environmentally friendly, helping to save trees, and keeping water bodies like rivers and streams clean.

Clearly defined ROI are easier to reach and are certainly more visible. Any investment made has to answer the following questions before the returns on that investment can be calculated.

1.      The problem that is going to be resolved with an investment

2.      How big is the need for the new product or service

3.      How does the new process work

4.      The effort involved for it

5.      How does it score over the old method

6.      The break-even point

7.      The goals to be achieved

8.      How does it benefit the members

While these questions are well defined, there are many that cannot be defined well enough. Streamlined operations, smooth functioning are some of the less tangible returns that cannot be calculated in money terms. Newer technologies often involve time saving, and indirectly convert into higher output. A comparison with the time before the implementation of the new system will help to appreciate the ROI more.

Technologies are often upgraded and the latest ones invested in, to keep up the ‘cool techie” image. Everyone believes in having the latest technological innovations included in their businesses and feel pleased with the super fast results. This is also part of the word-of-mouth marketing that is common place now, and reaps rich dividends for the new invention. This, combined with superior service, can lead to a windfall.

ROI thus, will be understood and noticed, only if they are pre-defined and known, and that is the only way to know that they have actually been achieved.

Author:- This is a guest post by Neil Jones who is head of marketing for eMobileScan, one of Europe’s largest online retailers of handheld computers and barcode scanners, including the Symbol MC70 and Symbol MC9090

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