Value is a crucial concept in Project Management. But there are different ways to calculate it. For my money, the most robust simple expression of value is Return on Investment, ROI.
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Return on Investment
Return on Investment is a widely used measure of the profit from an investment. It is used in many branches of business, public service, and the Not-for-Profit sector, in many countries.
Unlike simpler measures of value, there is one simple calculation that finance professionals use.
ROI is the ratio of Net Income to Total Cost
ROI = Net Income / Total Cost
And Net Income is Total Income minus Total Cost. So,
ROI = (Total Income – Total Cost) / Total Cost
ROI is typically expressed as a percentage, rather than as a numeric ratio. To express ROI as a percentage, we multiply the ratio by 100.
An ROI ratio of more than one, or a percentage of greater than 100% represents a positive return on investment – the higher, the better.
If the ROI ratio is less than one – or the percentage is less than 100%, the investment represents a loss.
Use of ROI in Commerce
In commerce, ROI has a wide range of uses. Examples include:
- measuring the profitability of stocks and financial instruments
- Evaluating business opportunities
- Comparing alternative project options
- Evaluating the success of a project
DCF and Limitations of ROI
One limitation of using ROI is that it doesn’t account for when costs are incurred or income is received. Money spent or received today is worth more than the same numeric sum spent or received n the future. If the impact of these differences is significant, a better methodology is to use a Discounted Cash Flow (DCF) to calculate either a Net Present Value (NPV) or an Internal Rate of Return (IRR).
Take a look at our companion video, ‘What is a Discounted Cash Flow – DCF?’
Recommended Videos to Help with Value and ROI
Carefully curated video recommendations for you:
- What is Value? …or Project Value? | Video
- What is Earned Value Management – EVM? | Video
- Benefits Management: the Missing Knowledge Area | Video
- What are Project Benefits? | Video
- How to Do Project Benefits Management | Video
- What is Opportunity Cost? | Video
Recommended Articles to Help with Value and ROI
- PM Formulas: Understanding the Math of Project Management
- Earned Value Primer: The Basics of EVM
- Benefits Management: What Every Project Manager Needs to Know [and Do]
What Kit does a Project Manager Need?
I asked Project Managers in a couple of forums what material things you need to have, to do your job as a Project Manager. They responded magnificently. I compiled their answers into a Kit list. I added my own.
Check out the Kit a Project Manager needs
Note that the links are affiliated.
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