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How to calculate ROI (return on investment)
Making the right decision on your return on investment (ROI) is very fundamental to making a good business decision. Whether you choose to invest in savings accounts, stocks, real estate or new business, making the best guess on a return on investment will better guide you in choosing among so many different investment options. Return on investment is one of the several approaches to building financial business wealth. Return on investment measures how effective a business uses its capital to generate profit and typically is based on the period of one year.
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To calculate ROI is actually a very complicated topic that is kind of hard to describe it in only a few words. Eventually, it can be done with intense research and hopefully the main idea is understood. To calculate a ROI there are three main data points to consider: the time period which is usually a period of one year, the capital investment and the return, which is the amount of profit made from the investment. A return on investment is a financial term used to compare what was invested against what was gained on the investment. It `s almost the same concept as used in stock or money market accounts to measure the effectiveness of the investment using an annual percentage.
Planning and building networks is a great job and career for anyone. However designing and implementing the new network must have a purpose and hopefully that purpose is to serve the business needs. Before implementing the new network project, decision makers want to know what kind of benefits they will get from the new network. While there are many excellent kinds of business benefits from this project such as increased productivity or better customer service, one of the best benefits to use to convince management is to show them the return on investment (ROI) that they will receive by implementing the new network. Try to keep it simple and especially focus on real dollar amounts, which will catch their attention.
There are three main questions to answer in order to calculate a simple ROI:
- How much are you spending now using the existing network system?
- How much do you anticipate to spend after the project is done?
- How much do you need to spend to complete the project?
Let's say that your current networking system costs you about $ 200,000 per month giving an average of $2,400,000 a year. After the project is done, your new network cost per month is now $100,000 which is a saving of about $ 1,200,000 per year. This is considerably huge as far as saving the company some money monthly and yearly. Let's say you needed to spend about $500,000 to see this project complete first by paying the cancellation of your existing network system, installation of the new one including labor and materials.
- $2,400,000
- $1,200,000
- $500,000
The ROI will show how long it will take before you can actually start saving money because of the new project. ROI shows how long it will take before you can see the benefits and especially the profits from your investment (in this case the investment was $500,000.) All you have to do is simply subtract your monthly savings from your initial investment costs. It takes about five months to recuperate your investment of $500, 000. The decision makers can decide if this is a good or a bad investment at that point. That same idea can certainly be used for other project or proposals. ROI is a wonderful tool to convince and sell proposals to managers, especially if it shows benefits to the company.
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