Thursday, 2 June 2016

Understanding ROI during Recession Times .Part 1: ROI Calculation

Dear HR , Training and Learning & Development Heads,
We have decided to educate our readers via learning how to measure ROIs in training for the next few weeks.  Hence please read our short articles, as this are snapshots from books that we ourselves in TLMM read.

Here is our Reading to you:

Budgets are tight, accountability is everywhere, and business results are expected routinely. All functions in an organization, including Learning & Development, face tremendous challenges to show value. The good news is we have partnered with an ROI expert named Professor Alias who will be contributing his sharing through TLMM during this economic turbulence.  Should you need to engage our expert to understudy ROI, we are here for you.  So meanwhile, lets start learning about ROI.

ROI is defined as Return on Investment.  Its a financial metrics describing the return on investment in a program, process or initiative.  This compares the monetary benefits of an investment to the investment itself.

How to calculate:
ROI =  Net Benefits x 100
Eg. For a program achieving RM650,000 in monetary benefits and requiring an investment of RM350,000 the ROI is:

ROI = 650,000 - 350,000 x 100 = 86%

The resulting ROI explains that for every RM1 invested in the program, the RM is returned plus a gain of 86 cents (RM0.86). The 86 Cents represents the return on the investment. While this seems like a reasonable return, acceptance of an 86% ROI is dependent on the standard to which this ROI is compared.

Whats makes good ROI?

Your ROI is only good when you:
1. Set the ROI at the same level as other investments, eg. 18%
2. Set the ROI slightly higher than the level of other investments, eg. 25%
3. Set the ROI at break-even 0%

How to identify the PAYBACK PERIOD (PP)  which an investment will pay back?  Its calculated by comparing the initial investment with the annual cask flows or monetary benefits due to the program.  Payback period is reported in terms of number of months or years.  Using the earlier example, the payback period for a program reaping RM650,000 in monetary benefits and costing the organization RM350,000 is this:

PP =RM350,000 =0.54

By multiplying 0.54 by 12 months, we arrive at a PP for this program of 6.48 months.  This tells your management that you can expect to see the recover of their investment in 6 to 7 months.

Until our next sharing on ROI, do test the above yourself.

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