Return on investment

Companies need to invest in their growth all the time in order not to stagnate, whether it is a little or a lot, it is inherent to their development. You have to invest money to make money. It can be in infrastructure, in technology, in human resources and training, for the development of products and services or in advertising and promotion, among others. This money is invested with the idea of obtaining more benefits or at least recovering the investment.

How do you know if you are being effective? Are you wasting money and time in this action? What strategies give better results? How long will it take me to recover my investment?

Return on investment (ROI) is one of the most important financial metrics. It will allow you to evaluate the success of your investment, assess the profitability, determine if it has been worthwhile and of course rectify mistakes (if you are in time) or improve your future performance.

What is ROI?

It is the financial metric that allows us to validate an investment by calculating the net profit obtained against the investment made in a given period. The result will tell us if we have gained little, a lot or nothing after putting money and resources into something.

By analyzing this result you can verify whether the goals and objectives set are being met. It is widely used to measure the performance and profitability of the actions carried out in the company. Currently it has special relevance in the design, implementation and evaluation of digital marketing strategies.

What is ROI used for?

Among other things to:

• Determine the amount of money generated by a given business action.

• Measure the profitability of investments.

• Convince investors to invest their capital in your business and the company to undertake a project.

• Identify where to put the money and how much to spend.

• Help, along with other variables, to define and guide marketing strategies to increase sales, reach and brand visibility.

• Set new, more realistic and timely objectives.

How is ROI determined?

ROI is an economic value that provides a positive or negative value. Its formula is:

• ROI= (revenue-investment)/investment.

The result is multiplied by 100 as it is represented as a percentage rate for analysis. The formula itself is simple, the difficulty lies in correctly identifying everything that falls into the income category and the investment category so that the result is real and useful.

What is taken into account as revenue? The net income that is collected for that particular investment, including operating costs and without adding other amounts such as taxes and interest.

What is considered as investment? All direct expenses/costs of the investment. Be careful not to disregard costs, nor include profits that are not directly related to the actions taken as part of the investment. Otherwise you may misinterpret the results.

For example that an email marketing campaign turned out to be less expensive than it was, or that you obtained higher profits than you actually did because you included sales that were obtained in other ways.

The objective is to know if it is working or not, so you have to check very well the data and where it comes from.

Payback period.

Another important information for companies is the payback period, that is, how long it will take to recover the investment and start receiving profits. In this way they can plan accordingly. It is also called payback period.

In reality it is a very close estimate, but not something written in stone since there are many external factors that can accelerate or delay its fulfillment. Therefore, the shorter the payback period of an investment, the lower the risk and the more peace of mind for the company and investors.

If the value of cash flows is constant throughout the year, its calculation is simple:

• PRI= Initial investment / average cash flow per period.

In the event that the cash flow varies, the cash flow expected to be received in the first year is estimated and the estimated cash flow for the following year is added to this accumulated amount, and so on until the period where the amount of the investment is equal and that will be the time it will take to recover the investment. This can be months or years.

It is important to calculate as best as possible the average monthly cash flow a