Understanding how to justify and calculate the return on investment (ROI) for a project is one of the most valuable tools a professional can have.
Managers, employees, and executives that know how to assess ROI are able to justify projects, provide better business insights, identify profitable projects from those that are not, and much more.
In this blog you will learn and understand the basics of financial valuation so you are able to put a monetary value to your upcoming IT, communications, and physical security projects. Keep reading!
What is Return on Investment?
Return on investment (ROI) is the metric used to portray how much profit will be generated from a project or investment overtime. There are two types of ROI depending on when it’s calculated. Actual ROI and Anticipated ROI
Anticipated ROI and Actual ROI
Anticipated ROI:
Anticipated ROI or expected ROI is calculated before the project kicks off, it is often used to predict the rate of return of your project to determine if your strategy makes sense or not.
Frequently, this forecast is ran under multiple scenarios to determine the complete range of possible outcomes and decide whether the project is profitable or not.
Actual ROI
Actual ROI is the real return on investment generated by a project. This number is calculated once your project has been concluded. Actual ROI uses the following metrics like final costs and revenue to determine if the project was indeed successful.
Positive VS Negative ROI:
Positive return on investment, or positive ROI, means that a project is considered profitable because it yielded more revenue when compared to its costs. On the other hand, negative ROI means the costs of your project where higher than the generated revenue.
Return on Investment Formula:
To calculate you must take into consideration three things.
Actual / estimated income of the project
Actual / estimated costs
Total profit generated by your investment
The ROI formula:
ROI = (Net Profit / Cost of Investment) * 100
In project management, the formula is:
ROI = [Financial Value – Project Costs) / Project Cost] *100
Return on Invesment Example
Let's say a company is considering implementing a new customer relationship management (CRM) system that costs $100,000 to purchase and install. The company expects the CRM system to increase sales and improve customer satisfaction resulting in a net profit of $50,000 over the course of the first year of use.
Using the ROI formula we can calculate the ROI for this project:
ROI = (Net Profit / Cost of Investment) x 100
ROI = ($50,000 / $100,000) x 100
ROI = 50%
So the ROI for this IT project is 50%. This means that for every dollar invested in the CRM system, the company expects to receive 50 cents in profit.
Keep in mind that the ROI we calculated is just an estimate based on certain assumptions. If anything changes in terms of how much you spend or earn, the actual ROI could end up being different. So, it's always a good idea to be prepared for some unpredictability when it comes to measuring the success of your project.
BTI, The IT Provider Near You
At BTI, we have more than 35 years of experience in the fields of IT, physical security, and communications. Our main goal is to deliver the foremost level of technical quality and reliability that can be delivered for your available budget.
Our partnerships with top industry providers allow us to deliver the best hardware and software solutions on the market at below market rate pricing! In addition, we will take care of your solution’s design, installation, maitnance, and support to make sure your invesment is built to last!