ROI question

ROI is one very small and simple part of management accounting. Yes, what you are asking about is indeed a function of management accounting.

measuring the

Simple but powerful, right?

What are some basic techniques and fomulas that would be useful to a small business person especially with regard to marketing and sales campaigns?

I am sure it would be much harder to calculate ROI on other things such as purchasing a new computer...

I wouldn't know where to start, given that:

- there have been hundreds, maybe thousands, of books written.

- I don't know your talents, skills, education or experience.

- I know nothing about your business.

Do you have an accountant? If so, why are you not asking the accountant? If not - why not?

What is your function in the business? If marketing and sales, shouldn't you be concentrating on that?

ROI - or any other accounting ratio - is of use only if used correctly and in appropriate circumstances. Calculated incorrectly, applied inappropriately, misinterpreted, or used in isolation without regard to other data, such tools can be far more damaging than useful - and a waste of time, effort and expense that could be better spent on basic activities such as traditional marketing and sales activities.

First step - do you have accounting and other management information systems in place now that produce reliable and useful information on a timely basis?

Second step - look at the information you are already receiving. Are you using the information that's already available? Can you draw any useful conclusions from it without trying to use "techniques and formulas" that you don't really understand? Can you see trends and relationships? Are changes in marketing and sales expenditures followed by changes in sales? What's the delay in response time for such changes? Are there seasonal fluctuations in your business? What external factors affect your business? etc. etc. etc.

".....harder to calculate ROI on.....purchasing a new computer?" Actually, that's a typical application of ROI; textbook examples are often "a new computer" (or truck, machine, factory, etc.)

If marketing and sales are your forté, maybe you should be considering books, courses or seminars in those fields. Good resources on these subjects will include methods by which to measure the success of efforts - methods that may be easier and simpler and more useful than ROI.

campaigns?

The purpose is for marketing plans. I am getting some new software that helps build marketing plans. One of its features is that it calculates ROI.

In a nutshell, my understanding is that you estimate if you invest $X on a marketing activity you get $Y in revenues from that activity. Of course, it is just an estimate.

The software does it but I want to have a bit more of an understanding and, yes, I am thinking of getting a book but I thought an accounting newsgroup would be a good place to discuss this...

On Sun, 31 Jul 2005 16:48:35 -0700, in alt.accounting "Robert Anderson" wrote in :

The value to you is approximately zero dollars.

Yes, it is. The better your estimating ability, the better the ROI calculation. Chances are that your informed estimates about the effectiveness of any marketing program will tell you exactly what the ROI will tell you in this software.

The basic idea of ROI is that you are evaluating how much you are making with a particular investment. The value is in using the same methodology for each alternative and then determining which alternative is the best given the circumstances. As you noticed, it is an estimate, but there are methods to analyze how sensitive the results are to the assumptions that you made. The real problem with the use of ROI is that there are people who look at the numbers and take them as graven in stone. ROI is no better than one method of trying to prioritize (another method that can be useful is Internal Rate of Return).

Sensitivity analysis may be the most useful part of any ROI or IRR analysis -- if your sales are 80% of estimate, 90%, 110%, 120% does this change your priorities? If so, why?

Enough already!