Return on investment (ROI)
Business decisions tend to have one of these economic reasons; Increase billing, which influences the growth of company profits, development and creation of new markets, develop new customers or sell more to existing ones, reduce costs, resulting in a reduction in expenses Reductions Inventory, reduction Cost of representation, reduction of selection costs.
The rate of return on investment is a financial indicator that measures the longevity of an investment, that is, the relationship between net profit or profit, and investment.
Created in 1977 by Gartner, the ROI concept spread and became popular in the IT market in the 1990s, when ERP implementation projects and integrated management packages became fashionable. It is no coincidence that in Brazil, more than 25% of local corporations have already used ROI metrics. A basic precept, however, is that it must always be measured in conjunction with the Total Cost of Ownership (TCO) concept.
The formula of the rate of return on investment is:
ROI = (Profit / Investment) * 100
ROI = (Gain - investment) / investment
The ROI can be used to evaluate a company in progress, if the ROI is positive means that the company is profitable. But if the ROI is less than or equal to zero, it means that investors are losing money.
Currently, software tools are built not only to ease the administrative routine and factory staff of companies, but also to help them economize. All of this was motivated by the great discussion fostered by the high costs of business management packages, ERPs, which in the 1990s consumed financial resources, time and disposal of information technology equipment, responsible for its implementations.
It is used when evaluating an investment project; if the ROI is positive it means that the project is profitable. But if the ROI is less than or equal to zero, it means that the project or future business is not profitable, because in case of putting itself Leaving would lose money invested. It allows us to compare different investment projects: the one with the higher ROI will be the most profitable and therefore the most attractive.
Two years ago, a process of physical consolidation of storage equipment in large corporations was included. Reflecting the global economic crisis and, in particular, the decline of the exaggerated projects of the so-called New Economy, the CIOs had their amounts reduced and had to maintain a gigantic structure of technology in all departments. And the data storage area was one of the sectors affected by the cost cut. Responsible for storing information generated by technology, these digital files, which replaced the mountains of paperwork, were creating too many costs for companies.
Investment fever in enterprise integrated management systems and ERPs (Enterprise Resource Planning) came to the fore in the 1990s to the extreme of lack of criteria, money was available and the contracting of a gender system was crucial. Better and more expensive, invariably, because the market evolved in this sense. As a justification, it was said that the system package would bring a completely modern and integrated management, if the company did not have anything of the sort, or if we talked about modernity or, later, looking at what systems could launch on the emerging Internet, At the end of the decade.
Benefits of ROI:
- Win the trust of customers.
- Enrich the processes.
- Identifies inefficient programs that need to be redesigned.
- Identifies successful programs.
- Forecast the success of programs.
- Technological Implementation
To compute the ROI, you need a reference to value to compare the indicators of improvement of the process, operation, product or service to be improved. The cost must include labor, materials, supplies and overhead costs. The accounting department can help you with the figures. A quality system cost, at a reasonable level of detail, can also give you some of the information you need, simply collect the most substantial costs.
This flexibility has a disadvantage, since return-on-investment calculations can be easily manipulated to suit the purposes of the user, and the result can be expressed in many different ways. When using this indicator, make sure you understand what inputs are used.
The disadvantage of this ROI calculation is that it does not take into account the fact that not all the money was invested throughout the year
ROIindicate the cash flow of an investment for the investor in a given period of time, usually one year.
ROI is a measure of the return on investment, not a measure of the size of the investment. While compound interest and dividend reinvestment can increase the size of the investment, return on investment is a percentage of return based on the invested capital.
In general, the higher the investment risk, the greater the potential return on investment, and the greater the potential investment loss.
Finally, we must point out that ROI, due mainly to its simplicity, is one of the main indicators used in the evaluation of an investment project; However, we must take into account that this indicator does not take into account the value of money over time, so when evaluating a project, it is always advisable to use it along with other financial indicators such as VAN and IRR.
ROI in IT, for every penny spent on hardware, software, people, systems and infrastructure, you need to know how much you will yield. Among dozens of other metrics, the ROI (return of investment) is affirmed as one of the leading in the race for total measurement. However, dominating that concept today means much more than anticipating the future: it is the factor that can take a project out of paper and transform it into reality.