Example Of Return On Investment Essay
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Investors prefer to derive quick profits for their investments. And, to managers, meeting such expectation requires close monitoring the indicators of profitability, such return of investment (ROI) and costs, whether hard or soft. The ROI may be analyzed in various manners, including such tools as net present value (NPV), payback period (PP), and profitability index (PI). Oftentimes a Post Implementation Audit (PIA) should be conducted, including the monitoring of deliverables and internal performance targets. These are crucial activities that any management worthy of their investors’ trust should ensure of implementing.
In any business undertaking, the investor wants to ensure a quick return, or at least as quick as possible, even stylish efficiency (Tobey, 2015). A business that makes no profit is a failing business. And it becomes a liability instead of an asset. A time frame measures the how fast the ROI goes back to the investor. It also measures the growth of the venture. Is it earning large enough or fast enough to justify the investment? Growth is expected to lead to increased income and high ROI, and the extra cash reinvested into the business or somewhere where the ROI is more desirable. Certain industries have their own peculiar characteristics in terms of profits and ROI. In hospitals, for example, the number of patients served provides a strong and oftentimes an accurate indicator of its profitability (Khurshid, Mark, & Luce, 2012). This essay will look into the concept of ROI, of the expected costs, and how to make sense of these in order to justify the expenditures.
The Return on Investment (ROI) [(Gain - Cost) / Price] is an important efficiency metric utilized to assess the performance of an investment or to relate the performance among a handful of investments. A negative ROI indicates a hold decision for the investment. It is flexible and easy to use. This measure has a weakness, though. It is easily manipulated to a several purposes. ROI can also be hard or soft. Hard profits (or direct profits) may be obtained in several ways: (1) Combining present structures to avoid paying support bonds on substituted resources; (2) Mechanizing an job to abolish intervention; (3) Stirring the activities from exceedingly costly assets to lesser ones (Gunelius, 2012). These are not hard to calculate. Yet, high predictable costs can be avoided or resource use efficiency implemented in the ROI computation.
Soft costs either do not occur all the time or companies have problems in assigning a dollar value to them. An error could be negligible or shattering. So, what numbers can be set in an ROI? Assigning a dollar value can be a lot harder due to subjectivity. A training program should consider such factors as increased business productivity, safer work environment, decreased employee nonattendance, better client satisfaction, an enhanced status amongst the company’s client base, and higher worker morale (Peter, 2011; Rebekah, 2009). An efficient training program can help achieve desired outcomes. Yet, it cannot exclusively claim responsible for the resultant increased profits.
Companies usually allow soft benefits at 10 to 15 percent. In analyzing benefits, computations may follow Formula 1.0 (William, 200). The more extra benefits there are, the lower the break-even point will be.
ROI = [(Hard Benefits + Soft Benefits) / Costs] X 100 Formula 1.0
Any capital expenditure should be equal or higher than the estimated profit or return on investment of the investors. In most organizations, such as in health care industry, accountability in investment spending is essential in ensuring that projects will earn the expected income and increase the shareholder value. For this reason, managers must analyze the required costs against the expected benefits of a project to ensure that the expected ROI is achieved. There are several methods used in analyzing the ROI, such as net present value (NPV), payback period (PP), and profitability index (PI), among others (Cleverly, Song, & Cleverly, 2011). Will the purchase of an Electronic Medical Record (EMR) be justified with positive cash flows throughout its life?
The ROI may calculate the expected benefits against the costs required (Khurshid, Mark & Luce, 2012). Businesses that purchase EMRs wants to minimize the required amount of paperwork; thus, improve the efficiency and effectiveness of healthcare services. In the justification of expenditure, the actual amount of the expense must be determined. For instance, installation and activation costs of an EMR ran at $40,000 (Blumenthal, 2009). This value is important in the financial evaluation of the capital expenditure.
Financial success depends upon understanding the dynamics of the business including its internal and external environmental factors. To keep in touch with the business, full financial audit of the entire business should be performed. The audit will examine the cash in-flow, the cost of investment among startups. Compared to the profits, a clear picture would emerge on the potentials of the business in the short and long term.
Performing the Post Implementation Audit (PIA) involves two levels of focus. The first level would determine if the rigid parameters (e.g. time frame or quantitative and qualitative deliverables) have been met. The expected deliverables are weighed against the realized results. The outcome provides a good picture of the ROI.
Customer feedback is another way of determining the accomplishments of business targets. Customers can provide colorful feedback that can help measure success or failure in the expected outcomes (Cleverly, Song, & Cleverly, 2011).
Lastly, an ongoing internal audit can provide a countercheck on the organizational workforce. Negligence of impact reporting will be detected through this program. Aspects of operations (e.g. employee absence, tardiness, unsafe work environment, and inadequate compensation) can provide so much information to the management.
Close monitoring of the ROI, the costs, and operational targets will help the management detect indications of negative growth trends, poor personnel performance, inadequate cash outflow controls. Keeping tabs on these indicators will help ensure a valuable investment or a waste of hard-earned capital (Ferris, Jagannathan, & Pritchard, 2003).
Andru, P. & Botchkarev, A. (2011, March 11). The use of Return on Investment (ROI)
in the performance measurement and evaluation of information system. Interdisciplinary Journal of Information, Knowledge, and Management 5(6): 245-269.
Blumenthal, D. (2009). Stimulating the Adoption of Health Information Technology. The New
England Journal of Medicine 360(15), 1477-1488.
Cleverly, W., Song, P., & Cleverly, J. (2011). Essentials of healthcare finance. Canada: Jones
and Bartlett Learning.
Ferris, S.P., Jagannathan, M. & Pritchard, A.C. (2003, May 6). Too busy to mind the business?
Monitoring by directors with multiple board appointments, The Journal of Finance 58(3): 1087-11112).
Gunelius, S. (2012, May 14). Understanding the new ROI of marketing. Forbes.com.
Khurshid, A., Mark, D. & Luce, S. (2012). Health Information Exchanges: Metrics to Address
Quality of Care and Return on Investment. Perspectives in Heath Information Management 1(1): 1-9.
Paul, R. (2009, October 11). How to measure soft ROI. Marketing ROI or DIE.com.
Tobey, J.S. (2015, February 28). Irving Kahn’s legacy to investors: Style is everything,
Wang, S. J., Middleton, B., Prosser, L.A., et al. (2003). A cost-benefit analysis of electronic
medical records in primary care. The American Journal of Medicine 5(1), 397–403.
William, I. (2000, June). Calculating project management’s return on investment. Project
Management Journal 31(2): 38-47.
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