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Return on Investment
ROI for an ERP implementation
Key business jargon in this context
Payback period
Cost Benefit Analysis
Business Case
Due Diligence
Quantifiable benefits
Headcount increase/ reduction
Obsolescence
Internal Rate of Return
Payback period
The payback period refers to the amount of time it takes to recover the cost of an investment. Simply put, the payback
period is the length of time an investment reaches a break-even point. The desirability of an investment is directly related
to its payback period. Shorter paybacks mean more attractive investments.
Payback period in capital budgeting refers to the time required to recoup the funds expended in an investment, or to
reach the break-even point. For example, a $1000 investment made at the start of year 1 which returned $500 at the end
of year 1 and year 2 respectively would have a two-year payback period.
The shortest payback period is generally considered to be the most acceptable. This is a particularly good rule to follow
when a company is deciding between one or more projects or investments. The reason being, the longer the money is
tied up, the less opportunity there is to invest it elsewhere.
Cost benefit analysis
Cost–benefit analysis, sometimes also called benefit–cost analysis, is a systematic approach to estimating
the strengths and weaknesses of alternatives used to determine options which provide the best approach
to achieving benefits while preserving savings.
A cost-benefit analysis is a process businesses use to analyze decisions. The business or analyst sums the benefits of a
situation or action and then subtracts the costs associated with taking that action. Some consultants or analysts also build
models to assign a dollar value on intangible items, such as the benefits and costs associated with living in a certain
town.
Business Case
A business case captures the reasoning for initiating a project or task. It is often presented in a
well-structured written document, but may also come in the form of a short verbal agreement or
presentation.
A business case provides justification for undertaking a project, programme or portfolio. It evaluates the
benefit, cost and risk of alternative options and provides a rationale for the preferred solution. The
purpose of the business case is to document the justification for the undertaking of a project usually based on the
estimated cost of development and implementation against the risks and the anticipated business benefits and savings
to be gained.
Due diligence
Due diligence is the investigation or exercise of care that a reasonable business or person is normally
expected to take before entering into an agreement or contract with another party or an act with a
certain standard of care.
It’s a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its
assets and liabilities and evaluate its commercial potential.
Due diligence is an investigation, audit, or review performed to confirm the facts of a matter under consideration. In the
financial world, due diligence requires an examination of financial records before entering into a proposed transaction
with another party
Quantifiable benefits ( tangible )
Tangible benefits are quantifiable service or financial gains to the organisation. Tangible benefits include: improved
effectiveness (eg, improved service delivery, improved access) improved efficiency (eg, reduced costs, more efficient use
of existing resources)
How do you quantify benefits?
Quantifying Value-Added Benefits
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Benefit to buyer. Whenever possible, quantify the value the buyer receives. ...
Convert numbers to bottom-line values. Try to quantify using dollars rather than percentages or time when
possible. ...
Link value-added benefits together. Look for as many value-added benefits as possible.
Headcount increase / reduction
a total number of people, especially the number of people employed in a particular organization.
The headcount, at its most basic, is simply the number of people employed by a business at a given time. Also known
as a workforce census, understanding who works for you and where they are within your company allows for critical
insight into the health and operational power of your organization
Obsolescence
Obsolescence is the state of being which occurs when an object, service, or practice is no longer wanted
even though it may still be in good working order.
Obsolescence in the business sense is the loss in value of an asset due to loss of usefulness or technological factors;
obsolescence describes an asset which is "out of date." Obsolescence is not related to the physical usefulness or
workings of the asset.
When a technical product or service is no longer needed or wanted even though it could still be in working order.
Technological obsolescence generally occurs when a new product has been created to replace an older version.
Internal Rate of Return
The internal rate of return is a measure of an investment’s expected future rate of return. As the IRR is an
estimate of a future annual rate of return, IRR should not be confused with the actual achieved
investment return of an historical investment.
IRR is the annual rate of growth an investment is expected to generate. IRR is ideal for analyzing capital budgeting
projects to understand and compare potential rates of annual return over time.
Typically expressed in a percent range (i.e. 12%-15%), the IRR is the annualized rate of earnings on an investment. A
less shrewd investor would be satisfied by following the general rule of thumb that the higher the IRR, the higher the
return; the lower the IRR the lower the risk.
Return on Investment
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. ROI tries to directly measure the amount of return on a particular
investment, relative to the investment's cost.
Return on investment is a ratio between net profit and cost of investment. A high ROI means the investment's gains
compare favourably to its cost. As a performance measure, ROI is used to evaluate the efficiency of an investment or to
compare the efficiencies of several different investments.
ROI vs IRR
ROI and IRR are complementary metrics where the main difference between the two is the time value of money. ROI
gives you the total return of an investment but doesn't take into consideration the time value of money. IRR does take into
consideration the time value of money and gives you the annual growth rate.
Across all types of investments, ROI is more common than IRR largely because IRR is more confusing and difficult to
calculate. ... Another important difference between IRR and ROI is that ROI indicates total growth, start to finish, of the
investment. IRR identifies the annual growth rate.