The most fundamental financial measure is return on investment. Companies use this measure to determine if they should take action — or if the action they took was worth it.
The classic ROI Calculation is this: ROI = Net Benefit/Total Cost.
You want a positive number here, which is why some companies even have ROI minimums before they take on a project. If your ROI number is negative, your persuasion priority is no good for your organization, and you should reconsider — even if your persuasion priority works to your own advantage.
ROI can be expressed in dollars, as a percentage or as a ratio.
How much did you invest, and how much did you receive in return? Let’s say you invested $100,000 in a marketing campaign, which in turn reaped $1 million dollars in sales.
ROI in Dollars
To find your ROI in dollars, use this calculation:
- Begin with the total dollars garnered from your initiative: $1 million
- Subtract the cost of your initiative: $100,000
- That leaves you with the dollars returned: $1,000,000 – $100,000 = $900,000
Not including the cost of the initiative would be a gross overstatement. Some financial experts might even consider this entire example a gross overstatement, because it doesn’t account for the cost of goods sold.
Let’s say the cost of goods sold in our example is $500,000. Now you have sold $1 million in product, but that product cost you $500,000 to produce and get to market. Our ROI dollars calculation now looks like this: $1,000,000 Gross Revenue – $500,000 COGS – $100,000 Marketing Investment = $400,000 ROI. If you want to appear reasonable, conservative, and responsible to senior management, use the gross profit number in your persuasive efforts.
ROI as a Percentage
Expressing ROI as a percentage is even more common than expressing it as dollars. Again, let’s use the same example of investing $100,000 and garnering $1 million in gross revenue — which, by the way, would be a fantastic investment! To find this:
- Calculate gross profit:
Revenue – COGS = Gross Profit —> $1 million – $500,000 = $500,000 Gross Profit
- Subtract your investment from the gross profit:
Gross Profit – Investment —> $500,000 – $100,000 = $400,000
- Divide that by your investment amount to determine a factor:
$400,000 / $100,000 = 4
- Then multiple that factor by 100 to give you a percentage:
4 x 100 = 400% ROI
A ratio demonstrates the quantitative relationship between two numbers, showing how many times one number contains the other. The most elegant way to write this is with a colon. In our example above, our initiative has a 4:1 ROI ratio.
Typically when using ROI ratios, whatever you invest is always 1. So if the marketing campaign example above cost $150,000 (instead of $100,000), you would simply divide $400,000 by $150,000 and find the product to be 2.666; now your ROI ratio (rounded up) would be to 2.7. That makes your ROI ratio 2.7:1. Not as compelling but still not bad!
The challenge with return on investment calculations is what’s included and what isn’t, on both sides of the equation. Do you include the total cost for salaried employees to work on your initiative as a cost? Do you attempt to quantify improved morale as a benefit? With ROI, like all measures, it’s valuable to consider those inclusions and exemptions. Every company has different ways of looking at the numbers.
One final note about ROI calculations: If you are using these calculations to forecast anticipated ROI, you may want to run a few different scenarios. What if sales are off by a particular percentage? What if your cost of goods sold is higher than anticipated?
As I’ve mentioned in the past: Know this kind of stuff, and you’ll be well on your way to becoming a professional persuader — because you’re proving the viability of your ideas and initiatives to your targets.
Up next: The Breakeven Calculation