ROI (return on investment) calculations

ROI is a technique derived from financial analysts which uses the formula:

 
On paper, this looks sensible and useable, in practice it is quite difficult to apply particularly for leadership development activities. Calculating the costs of a programme are relatively easy, if somewhat time-consuming and disputable; the problem lies in defining gains made from a leadership development programme. For example, if the aims of a programme are to promote better communication and to encourage managers to become more entrepreneurial then it becomes difficult to make clear links between these objectives and business outcomes because of the effort and uncertainty involved in disentangling all of the variables involved as well as the likely time lag between learning and outcomes.

ROI for small businesses

Small businesses do not present quite the same set of issues as those raised above. In fact, ROI is actually easier to use, the smaller a business is. The reason for this is that we know from research which has been carried out in the small business sector that leadership development undertaken by owner-managers of small firms is likely to have a direct impact on business measures because the owner’s development is crucial to the business’s development.

So an ROI calculation would see on the top line, ‘Gain from investment’, any increases in profit in the period after the owner was involved in the development. Of course, this profit may be due to any number of things but if you combine this kind of ROI analysis with other data (e.g. from a learning journal or an interview) then you could quite easily make the connection between learning and increased profitability.

Click here for an example of calculating ROI in a micro business.