Knowledge Series

Knowledge Series # 1

What Is Return on Investment (ROI)?

Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments.

In other words, Return on investment (ROI) is a financial ratio used to calculate the benefit an investor will receive in relation to their investment cost. It is most commonly measured as net income divided by the original capital cost of the investment. The higher the ratio, the greater the benefit earned.

ROI Formula

There are several versions of the ROI formula. The two most commonly used are shown below:

ROI = Net Income / Cost of Investment (in case of profitability)
or
ROI = Investment Gain / Investment Base (in case of a specific investment) 

Return on Marketing Investment (ROMI) Definition 

The ROMI as a Key Performance Indicator (KPI) measures how much revenue a marketing campaign is generating compared to the cost of running that campaign.

Return on Marketing Investment, Example

A company spends Rs. 100,000 on a marketing campaign and generates an additional revenue of Rs. 600,000 attributable to the marketing campaign, Then the ROMI  for that marketing campaign investment is calculated as follows:

Return on Marketing Investment = [(600,000 - 100,000) / 100,000)] x 100 = 500% or 5:1

In the same example above, if the Gross Profit percentage is 40% then ROMI in terms of contribution is,

Return on Marketing Investment = [(600,000 X 40% - 100,000) / 100,000)] x 100 = 24%

Benefits of the ROI Formula:

1. Simple and Easy to Calculate - The return on investment metric is frequently used because it’s so easy to calculate. Only two figures are required – the benefit and the cost. Because a “return” can mean different things to different people, the ROI formula is easy to use, as there is not a strict definition of “return”.

2. Universally Understood - Return on investment is a universally understood concept so it’s almost guaranteed that if you use the metric in conversation, then people will know what you’re talking about.

Limitations of the ROI Formula:

1.The ROI Formula Disregards the Factor of Time - A higher ROI number does not always mean a better investment option. For example, two investments have the same ROI of 50%. However, the first investment is completed in three years, while the second investment needs five years to produce the same yield. The same ROI for both investments blurred the bigger picture, but when the factor of time was added, the investor easily sees the better option.

Conclusion: The investor needs to compare two instruments under the same time period and same circumstances.

Knowledge Series # 2

As part of MSME Knowledge Forum’s initiative to understand MSMEs better and make tailor made programs for them, we are conducting a ‘Preliminary Assessment’ survey.  In this survey, we are seeking responses from you against 8 functions on a scale of 1 to 5.  This survey will take less than five minutes to complete.  Your responses will be kept strictly confidential among the core team members.  

Please CLICK HERE to participate in the survey

We have broadly categorised the survey into 8 main functions.  Please find below relevant sub-questions in six of the eight functioons that will help you fill the survey quickly and correctly.  You may pose similar sub-questions while choosing your option against other two functions as well.

We would appreciate all of you to participate in this Survey which will be an opportunity for you to assess and identify the areas you can improve/strengthen your own processes.  Pls take just 5 minutes of your precious time to send your response.