Administrative And Selling Expenses In Statement Of Cash Flows Show Me the Money: Basics of ROI

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Show Me the Money: Basics of ROI

The large dollar amounts reported in many companies’ financial statements perform ratio analysis, a method of evaluating a company’s various financial characteristics. In most cases a single ratio does not describe much about the company whose statements are being studied. A more meaningful analysis is done when the trend of that ratio is studied. The reason for comparing a particular company’s ratio with its competitors or the industry as a whole is to assess the company’s relative strength and position. Knowing a company’s return on investment for just one quarter is not enough. It doesn’t tell you much about the company. That is why we have to analyze the trend. This results in more meaningful comparisons because even though the data used in the ratio may have been developed under different financial accounting frameworks, the consistency in each trend will be useful in making comparisons.

“Show me the money” is the most popular quote from the movie Jerry McGuire. It is used when a player wants his agent to earn him more money. Executives everywhere in today’s world are using this mantra and so are shareholders. Executives are no longer satisfied with average results. Instead, leaders, shareholders and even taxpayers want to see a financial return on their investment. Organizations use the basic ROI equation revenue versus investment or net benefit versus cost for all types of projects. Why do organizations apply ROI to types of projects such as leadership, marketing, communications, etc.? The intention is that everything should have a return on investment. Every project should bring profit to the organization.

A firm’s ROI is important to most financial statement readers because it describes management’s rate of return on assets available for use in that particular year. Investors will make decisions based on ROI and the quality of management and relative profitability of the company. What would an investor do knowing the net income? Decision information relating net income to assets used to generate net income is required.

Some analysts prefer to use income from operations and average operating assets in ROI calculations. Calculations are time consuming and require accurate judgment. With technology making everyone’s life easier, there is one company that has made this calculation much easier. With organizations using ROI in their measurement mix, there is one company that helps ROI methodology. iDNA, Inc, formerly known as National Auto Credit, Inc. operates in three major segments: Strategic Communications Services, Information Services and Entertainment. iDNA has adopted one of its audience response systems to support the ROI methodology. The “ROI Toolkit” will collect data in real time and allow executives to predict ROI. This technology will make it easier for analysts to estimate ROI and save time.

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