WHAT IS ROI? HOW DO I USE IT?
by Gavin King CA
The Return on investment (or ROI) is the driver of the modern economy. It is a financial concept known for its simplicity and versatility. ROI measures the profitability or efficiency of an investment. The main idea behind ROI is to calculate the return (or benefit) of your investment.
There are several methods to calculate The ROI, but the most well-known is the one formula below. The final number equals to ratio or percentage.
For example, Jack invested $1,000 in April 2019 into his local pizza business. Twelve months later, in April 2020, Jack had a $1,200 return from the business owner. To calculate his return on investment, Jack would have to divide his profits ($1,200 – $1,000 = $200) by the investment cost ($1,000) For an ROI of $200/$1,000 or 20%.
The ROI is supposed to be used as a tool for business people to help them decide between purchase and investment or more commonly to eliminate and select the better option.
The calculation above is not too complicated of ROI. Jack is analysing his return on investment. He can compare his investments into local pizza business with his other financial ventures.
Are there other types of ROI?
As the world improves, several businesses and investors have taken a keen interest in the development of new measures of ROI. The SROI or Social Return on investment, developed in the early 2000s, takes into account the Social and Environmental governance and its impact on responsible investing strategies. For example, if Jack’s local pizzeria decides to use the rainwater or replace its lighting with LED bulbs, these investments will have a negative impact on traditional ROI because of undertaken costs. Nevertheless, the net benefit for the society or environment could lead to a positive SROI.
The Return of Investment shouldn’t be considered in terms of “your-investment-only look” at the government. They, similarly to Jack, invest in community and society or research. Government can provide substantial monetary rewards with just one proposal and some of them are worth billions of dollars. These grants can be prestigious and give any organisation instant credibility and public exposure.
In light of the economic ramifications of the Coronavirus outbreak in Australia, the government announced a new suite of welfare packages. One of them is JobKeeper payments, a wage subsidy to keep staff on until the restrictions are eventually lifted. To prevent grant fraud or misuse, the Governing bodies (such as ATO in this example) have prepared tax consequences.
Similarly, the City of Sydney and the City of Parramatta are helping small businesses, especially in the hospitality and tourism sector, to keep them afloat during tough times. Organisations located in the local government area, employing between 1 to 19 full-time staff with an annual turnover of less than $ 10 million can apply for a small business grant. The grant is aimed for operating business model change to online/e-commerce and these changes will have to include: online content development – such as developing a webpage or mobile apps or Training and professional development in online and e-commerce activities. The maximum business can apply for is $10,000. After 6 months, the grant benefactor needs to show how this grant has helped business.
It all sounds lovely until the business owner realises how much the operating model change will cost him. The cost and time associated with developing a website or app can be exorbitant. The price depends on the complexity of an app or webpage. While simple apps or small webpage with 8-10 pages takes approximately 3-4 months to build, more complex websites and apps require more work and time and may take up to 28 weeks. Standard apps or web pages offering in-app purchases, online tracking system, or other web services cost at least $25,000 reaching up to $100,000 for a sophisticated app.
The insane e-commerce development costs associated with purchasing and installing new equipment, online content development, staff training etc. requires more effort and time than could be reasonably expected and makes it the e-commerce grant not worth it financially.
To sum up, the world of investment is transforming and the economy is remodeling itself. A new ways of return on investment are sure to be developed in the future, give serious and careful thought to investing in yourself because it is one of the best investments you can have.
Gavin is an Associate and the Director of Insolvency at Condon Advisory Group. He has over 15 years of experience in all aspects of Personal and Corporate Insolvency. Gavin is also currently the Secretary of Penrith Chamber of Commerce.