Humbled by the ROI

 

During yesterday’s Management Accounting class, when our professor said, “Class, just a reminder, make sure that by the time your reach your STRAMA defense, you should already know what an ROI is all about.” He then added, “…because if you don’t, it’s either you are bobo (dumb) or your teacher was.” I was amazed at the remark but at the same time smiling because I was telling myself, “ROI lang pala…I’ve been dealing with it for years when I was at work.” That smile though was short-lived.

Trying to check if someone can at least explain what an ROI is, the professor asked the class. I confidently raised my hand and said something like, “…well, it’s a sort of measurement to justify if a project is feasible or not and when the a money invested into it will…” I was cut short by our professor, this time he’s the one smiling.

He explained that ROI (or Return on Investment) is a debatable indicator, thus should be avoided, in business and that it is more appropriate and more meaningful if an accountant would rather present using ROE (Return on Equity) or ROA (Return on Asset) just so to be exact of what is being actually measured. But whichever one prefers to use, ROI, ROE or ROA, none of these is presented using time as its resulting unit but rather in percentage. 

Feeling uneasy about it, I approached him during our break time and I explained that to justify a project at work, we are usually asked to have an ROI of three years, for example. Eager to make me understand, he said that the correct term for such measurement is payback and not ROI. And after showing to me the difference between payback and ROI, I was enlightened…and humbled. Man, it really sucks to relearn, huh?

 

***

Tonight, I did my own research and true enough, he was right. Check these links:

http://www.valuebasedmanagement.net/methods_roi.html

http://www.bnet.com/2410-13240_23-66470.html

***

 

Mood: 3/10 Honks!

 

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