This lesson is in Calculating ROI – one of the most important gauges of business success today
Return on investment, or ROI, is the overall profit made on an investment expressed as a percentage of the amount invested. It is helpful when you are evaluating a program or project. ROI is one of the most important gauges of business success. If you find yourself thinking of measuring the effectiveness, worth, cost, objective, value, money, impact, justifications, benefits, success, improvements, time and resources of a project but you don’t know how, ROI can be a good start. This presentation will help you learn how to calculate your ROI when evaluating a project.
The most important issue in corporate training industry is the ability of connecting the results of employee training to the bottom line or the return on investment of the company. Evaluating training programs is nothing but assessing its effectiveness and progress continuously. Kirpatrick’s evaluation levels here show ROI being on top.
There are five steps that assist in calculating ROI. The first, second, and third step are crucial. The forth and fifth step serve as exercises to further understand ROI calculations.
In Step 1, You have to determine the project’s total benefits shown here as Net Profit.Make sure not to confuse net profit with gross revenue. For non-accountants but financiers, net profit is also known as Bottom-line. A simpler definition of net profit is the difference between a cost of a project and the financial benefits it provides once it is completed.
In Step 2, You have to calculate the project’s total cost which can be found by adding total debt to total equity. The total cost of a program or a project takes into account a wide range of expenses, including all fixed and variable costs associated with completing the program or project. Investment or cost examples are shown here.
In step 3, you must divide net profit by total investment and multiply by 100 to find the basic return on investment. For example, if net profit was 10,000,000 and the total investment was 30,000,000, then the return on investment would be 33%.
Step 4 shows you how to calculate the dollar amount of the ROI. For example, if the total cost for the project was $30,000,000 and the total benefits were $40,000,000, then the ROI is $10,0000. To Calculate the ROI Percentage you must divide Net Profit from Total Investment then multiply by 100. For example:($10,000,000/$30,000,000) X 100 = 33%
Always remember that practice makes perfect. Keep practicing these ideas until you become comfortable enough to explain this to your students or employees.
Why measure results? Measuring results provides valuable insight that can drive evidence-based continuous improvement and create payoffs such as:Align programs to business need Show contributions of selected programs Earn respect of senior management Enhance program design, implementation and operation Defend existing budgets Justify future programs Improve support for programs Identify inefficient programs that need to be redesigned or eliminated Identify successful programs, and/or key elements, that can be implemented in other areas
Calculating ROI One of the most important gauges of business success DeartaLogu Program in Higher and Post Secondary EducationSteinhardt School of Culture, Education and Human Development
What Does Return On Investment – ROI Mean? A performance measure used to evaluate the efficiency ofan investment/project or to compare the efficiency of a number of different investments/projects JUSTIFICATIONS TIME & RESOURCES WORTH VALUE IMPACTEFFECTIVENESS OBJECTIVE BENEFITS IMPROVEMENTS MONEY COST SUCCESS
Evaluation Levels ROI ORGANIZATIONAL BEHAVIOR JOB BEHAVIOR LEARNING REACTION
Steps Steps to Calculate ROI1. Determine Net Profit2. Calculate Total Investment3. Multiply by 1004. Find the Value5. Practice
Step 1 Determine Net Profit Determine Net Profit Net Profit = Revenue – Expenses
Step 2 Calculate Total Investment Total Investment = Total Liabilities + Total Equity Investment or cost examples: 1. Labor 2. Materials 3. Equipment 4. Warranty 5. Insurance 6. Travel 7. Real Estate
Step 3 Multiply by 100 ROI Percentage = (Net Profit/Total Investment) X 100 Example: (10,000,000/30,000,000) X 100 =33%
Step 4 Find the Value To Calculate ROITotal Benefits –Total cost = ROI Example:$40,000,000 - $30,000,000 = $10,000,000 To Calculate ROI Percentage(Net Profit/Total Investment) X 100 = ROI % Example: ($10,000,000/$30,000,000) X 100 =33%
Concluding Comments Why measure results? Enhance program design, implementation and operation Defend existing budgets Justify future programs, etc.
References1. Croes, S. (n.d.). Kirkpatricks Four Levels of Evaluation. Masterminds. Retrieved November 12, 2011, from Kirkpatricks Four Levels of Evaluation2. Methodology. (2010). ROI Institute: ROI Resource Center. ROI Institute: Home. Retrieved November 12, 2011, from http://www.roiinstitute.net/roi-resource-center3. McNamara, C. (n.d.). Evaluating Training and Results (ROI of Training). Free Management Library (SM). Retrieved November 12, 2011, from http://managementhelp.org/training/systematic/ROI-evaluating-training.htm4. Murray, L.W., and Efendioglu, A. M. (2007). Valuing the investment in organizational training. Industrial and Commercial Training. 39(7), 372-379.5. Phillips, J.J. & Phillips, P.P. (2008). Distinguishing ROI myths from reality. Performance Improvement. 47(6), 12-176. The Kirkpatrick Philosophy. (n.d.). Kirkpatrick Four Level Model of Training Evaluation Created by Donald Kirkpatrick Kirkpatrick Partners, Home of Donald L. Kirkpatrick and the Kirkpatrick Four Levels Evaluation Model. Retrieved November 12, 2011, from http://www.kirkpatrickpartners.com/OurPhilosophy/tabid/66/Default.aspx