<< Back to current posts
By: Pellham Realtors
Many professionals can be intimidated by terms like "pro forma," particularly as they involve math. Though they can be complex to implement, these documents aren't at all tough to understand.
Defining ROI
The heart and soul of a financial pro forma is to calculate the ROI (define) of an initiative. Basic ROI is a key financial metric that determines the value of business investments and expenditures. Mathematically speaking, it is a ratio of net benefits divided by costs and is usually expressed as a percentage:
ROI = [(monetary benefits - cost)/cost] x 100 An ROI Calculation
Let's say a company's e-business team wants to implement Web services technology, which will cost $75,000. They believe the initiative will result in a 10 percent increase in software automation. What does that mean to the company as a whole? Does it make financial sense to do so?
At this point, the e-business team has the Web analysis group look at other data. They learn each 1 percent increase in software automation increases overall annual profit by $25,000 per year. This would yield $250,000 in a 10 percent increase. The company can calculate this investment's ROI as follows:
[($250,000 - $75,000)/75,000] x 100 = 233% Payback Period
ROI is merely a percentage, however. To get real visibility into ROI, you also need to look at payback time. This is the time it takes an investment to pay for itself. For example, if a $100,000 investment in Web services technology generates $400,000 a year in profit, it pays for itself its three months.
Payback periods are very important. What if you make an infrastructure enhancement that will pay for itself in four years? Chances are, the particular change you made may be replaced by other systems before it pays for itself. In that case, you'd realize a net loss rather than a gain.
Payback Period Analysis
The best way to understand the value of an initiative is to use payback period analysis. This methodology looks at the entire effect an initiative will have on every aspect of a company's bottom line. It then calculates the length of time it will take for the initiative to yield enough returns to pay for the initial investment.
To do this, you have to look at the initiative's direct and indirect benefits. Direct benefits measure the cash flow generated by the initiative. Indirect ones include such things as overall brand impact. They're more much more difficult to measure.
Some examples of direct benefits include:
Visit-to-purchase conversion
Online media units
E-mail conversions to purchase
Articulation and measurement only moderately difficult
Self-serve via the Web vs. higher cost channels, such as retail or phone systems (IVR)
Automation of services, such as account access in financial services and airlines
Account tracking Indirect benefits include:
Word of mouth
Brand affinity
Visit length
Product consideration
Branded entertainment
Communities
Of course, other metrics can be useful in payback period analysis. Customer lifetime value, value of leads, and value of cost savings can all contribute to overall ROI.
Conclusion
With a new insistence on financial pro forma reporting, our fictional CMO will be able to understand the financial impact of every Web initiative his company undertakes. That way, he can focus on things that help the bottom line... and shelve those that don't.
Branson Missouri Great Real Estate Opportunities!
By: Pellham Realtors
Branson, Missouri, is situated in southwest Missouri 35 miles south of Springfield, Missouri’s third largest city. Branson is conveniently located within a days drive of more than half of the country's population.
By: Pellham Realtors
Pellham Commercial Realtors is proud to announce the launching of our new website, designed by Departika. According to internet statistics, over 78 percent of property investors begin their search on-line. We hope you find this site to be an informative and useful tool when it comes to finding the right property for sale or lease. Don't miss our Residential section, designed for Pellham Residential Realtors. Soon you will be able to search all of Multilist for residential properties right through www.pellhamrealtors.com. We would love to hear from you - please email and let us know what you think of our new website.
FORBES RANKING LISTS SPRINGFIELD IN TOP 25
By: Pellham Realtors
FORBES RANKING LISTS SPRINGFIELD IN TOP 25
Springfield recently appeared in the top 25 of major metro areas in the United States for its low cost of doing business, a key factor in retaining and attracting business.
Garnering a rank of 21st, Springfield rated ahead of Missouri's two other large metro areas in a Forbes Magazine’s “Best Places in the U.S.” Springfield was the smallest metropolitan area in the top 25. The chart below depicts how Springfield compares with its peer cities as well as Kansas City and St. Louis.
METROPOLITAN AREA RANK Lexington 4 Mobile 10 Springfield 21 Little Rock 24 Chattanooga 28 Wichita 31 Knoxville 34 Memphis 41 Colorado Springs 43 Kansas City 60 St. Louis 68
Tulsa took the number one spot. At the bottom of the ranking, at number 150, was New York City.