Return on Investment (ROI) used to compare the efficiencies of the number of different investments in a project. If the ROI is high this means the investments were profitable to the cost incurred. This can be seen as a ratio of output over input and expressed as a percentage. When it comes to projects it is important to check if the project returns are in line with or higher than the initial investment done that too within a specific time frame. So let’s see both financial and business metrics that will help the project managers to boost their ROI on projects:
Financial Metrics –These metrics are the quantitative KPIs used to measure ROI calculations. These metrics can be used to measure the project success based on the investments made:
Net Present Value – This value determines how profitable a project or investment will over a period of time. The formula to calculate the NPV is
NVP revolves around the fact that if the money invested today will have a higher value in the today than in the future. NVP is the deciding factor for managers where or not they will go ahead with a project. The initial project investment is deducted after discounting the cash flows over a specific time. If the result is positive then the project is accepted if the NVP is negative then the project is rejected. This helps to visualize if the prospecting project will be a good buy or a loss to the company. (Tax, 2020)
Discounted Cash Flow(DCF Analysis) – The discounted cash flow will help the business leaders to determine how much they need to invest today to get a profitable payback in the future. The DCF is the component of the NPV and helps to determine the value of a project investment based on future cash flows. This at times can be inaccurate based on the fact that it depends on future cash flows. (CHEN, 2020)
Internal Rate of Return(IRR) –This quantitative metric can be used to compare different prospect projects to estimate their profits. It uses the same NVP formula but here it set NVP equals to zero. So it is important to know that IRR is not the actual value of any project but represents the annual return by keeping NVP as zero.
Payback Period – This financial metric determines how long it will take for a business leader to recover his cost of investment or reach the break-even point. Shorter payback periods are proportional to profits and thus are accepted over longer payback periods. They are calculated by dividing the investment amount by the yearly cash flow. They play a major role is heling the project investors whether to invest in a project or no.
Expected Commercial Value(ECV) – The ECV can be seen as a factor used to maximize the commercial value of a project portfolio within a limited budget. This metric is used to access the innovation projects and decide which project to choose in uncertain situations. It is represented as a decision tree consisting of various project uncertainties and outcomes and each of these has an NVP assigned to them. ECV does not consider the non-financial metric of a project and so most of the time it doesn’t account for desirable project outcomes
Business Metrics – These metrics are the qualitative business KPIs used to measure ROI calculations. These metrics are difficult to measure but very important to measure the project value.
Efficiency and Productivity- The efficiency and productivity merits can help to analyze the team’s performance and forecast the success of the project in the future. If the team is performing well this will lead to improved team collaboration and a smaller project lifecycle. Also, the manager can develop prototypes to analyze factors having adverse effects on both resources and assets inclined to the project.
Market Factors For successful project delivery, the manager needs to consider several market factors. These can be adding new product features, introducing new services, timely delivery, meeting customer expectations, improved product quality, applying new market trends, etc. so a manager needs to measure the overall customer experience and brand image for any potential project at hand.
So we have seen both business and financial project metrics for calculating Return on Investment for projects. It is always a best practice to integrate both the metrics to determine the accurate and realistic ROI for a project.
- CHEN, J., 2020. Discounted Cash Flow (DCF). [Online]Available at: https://www.investopedia.com/terms/d/dcf.asp#:~:text=Discounted%20cash%20flow%20(DCF)%20is,will%20generate%20in%20the%20future [Accessed 8 October 2020].
- Tax, C., 2020. NPV ( Net Present Value ) – Formula, Meaning & Calculator. [Online] Available at https://cleartax.in/s/npv-net-present-value[Accessed 8 October 2020].