Maximizing Return on Investment (ROI)

- The finance team is responsible for money. Not only are they responsible for acquiring the cash, they're also responsible for figuring out how to best use the money. In essence, finance is tasked with getting the company the best return on their investments, the best ROI. ROI is calculated by using this formula, the return, or profit, gained, divided by how much was invested in that venture. ROI will be a percentage. This percentage represents how much you grew your initial investment. For example, suppose an entrepreneur has $100,000. If they invest all of the money in starting a coffee shop and then sell the coffee shop for $250,000 four years later, what would be the ROI? They invested $100,000. So that is the investment in our denominator. They sold the shop for $250,000 and they invested 100,000, so their profit or return was $150,000. This would be our numerator. So the ROI is 1.5, or 150%. The return was 1.5 times greater than the initial investment. This is how the finance team thinks. Finance is constantly concerned with maximizing ROI. Now imagine that you work on the Starbucks finance team and your team is responsible for $10 million of investment capital, money available for new projects. Your boss will judge you based on the ROI you get by investing those $10 million. When you go to your next meeting, an executive tells you they would like to use the $10 million to open a new high-end coffee shop and bakery in the middle of London. Another executive argues that the high-end coffee shop should be in Singapore. You're responsible for the $10 million. So how can these executives convince you which city will bring the best ROI? Well, you'll want to better understand the investment and of course the possible return. So you'd probably ask the executives, "Explain how you would use the $10 million, "and give me the details "of how every dollar would be spent." If they don't have well thought out answers, you'd likely lose faith in their idea. And of course you'd want to know about the return. You'd want a marketing report telling us about the number of expected customers and how much they'd likely spend. Plus, an operations report estimating our profit margins. In your company right now, there are so many projects going on, so many business opportunities to choose from. Finance teams are under incredible pressure to evaluate every opportunity and then decide which are worth investing in. And always they are looking to maximize the company's ROI. Think about a project you feel might help your company grow. Try and estimate the cost of this project, where every dollar will go. Then be able to explain the profit potential of that project over the next three years. If you come prepared with this detailed information and you discuss the project in terms of ROI, the finance team will be impressed. And who knows, they might even approve the funding for your project.