Val Grubb & Associates - The Office Operations Problem-Solvers

Part 4 of a 5 Part Series on Budgeting and Finance for the Non-Financial Manager

ROI calculations have extensive application in the financial world. If you’ve been involved in capital expenditure (CapX) budgeting, such as large equipment purchases, acquisitions or the development of new products, you’ve probably done ROI calculations before committing to the expense.

These calculations are typically quite extensive, as they involve a concept called the time value of money. In its simplest definition, it means a dollar today is worth more than a dollar collected tomorrow, which is worth a WHOLE LOT more than a dollar collected in ten years. The challenge with future money is that there are risks associated with actually collecting it.

If you’re involved in CapX budgeting, I’m guessing you have financial tools to calculate ROI which take into consideration the time value of money. A pretty comprehensive spreadsheet is offered for a small fee from Engineering Solutions On-line if you’re in need.

Next, let’s look at ROI calculations (also called cost/benefit analysis) for smaller projects that may be included in your Operating Expense budget. The calculations are basically the same; however, the payback period is within the same year, thus the time value of money is not in play.

The top chart illustrates the calculation for outsourcing benefits administration. ROI calculations start by determining the total costs and benefits for the initiative. In this example, the costs would be $900k with $1.2 million in savings. The Net Yearly Benefit is $300k, which equates to $33,333/month in savings to the company. However, it cost the company $100,000 to transition to an outsourced model, thus the ROI is $100,000/$33,333, or three months. This means that the breakeven point (or payback period) is three months. This means the company does not see a financial benefit until month four, because it took three months to recoup the $100k investment.

The second example here details the ROI for offering a presentation skills class to junior sales associates designed to increase their selling abilities. Take a look, and let me know if you have any questions. These charts are easily duplicated (and expanded) in Excel depending on your needs.

ROI calculations are a powerful resource when making decisions between competing projects, and should be used whenever possible.

Tune in next week for the final blog on Budgeting, which will detail fundamental elements of the three key financial statements.

I had the pleasure last week to participate in a panel session on the ROI of Social Media hosted by the Kelley School of Business at Indiana University in NYC.

Other panelists included:

Ruthie Wittenberg of NBC News;
Seth Silverstein of Entertainment Weekly;
Russell Pearlman of Smart Money and
Brent Campbell of A Hundred Miles an Hour

It was a fascinating discussion and one that continues to evolve and gain momentum as companies struggle to monetize their social media strategies. Although by far not entirely comprehensive (as we could have gone on for DAYS on the subject, not merely one hour), I thought I would share some insights from our Panel session:

• Sales of Old Spice body wash have increased by 107%+ since launching their "Man Your Man Could Smell Like" campaign. This campaign gained a huge following through a multi-pronged effort heavily involving social media - panelist Brent Campbell commented on the campaign, "140 million YouTube hits can't be wrong."
• Twitter celebrated its fifth year of operation in March. If you’re not familiar with how powerful Twitter can be, contemplate that on average, there are 140 million (and growing) tweets sent per day.
• Ann Curry won “Tweet of the Year” last year for a tweet that informed the Air Force that planes full of physicians trying to aid the Haiti relief effort were being prevented from landing. Due to all of the re-tweeting that took place to @usairforce, the planes were quickly allowed to land.
• Do you know the dollar value of a Facebook fan for a brand? Well, to be honest, we couldn't nail that down either. One study claimed it to be $137, while another said it was $3.60. The conclusion we (the panel) came up with is that a Facebook fan is certainly valuable, but that dollar value depends on a myriad of factors about your company and your product. Along this same line, I read a fantastic summary by Ellen Kolsto of comments from Jen van der Meer of the Dachis Group at this year’s SXSWi: “the idea of loyal customers is becoming outdated in favor of social customers: the people who both buy your brand and tell others about it.” Well worth the quick read if you’re struggling with calculating ROI.

Certainly the over-arching theme shared by all panelists was that defining your goals and doing diligence to create a meaningful social media strategy can and will drive results (although calculating an actual ROI can be tricky at best). The biggest take-away was that you have to create a focused plan that includes actionable follow through (not just an occasional post or tweet).

To offer you more specifics, my next blog will deep dive into specifics regarding my own Social Media Strategies that may be beneficial for your business.