The reason return on investment (ROI) is so important today is that business leaders are asking tougher questions. What they want to know is how much ‘bang for bucks’ they get out of every pound spent on training.

First, let us look at the ROI formula, which is: -

This formula can be used to calculate the return on any business investment, such as a new piece of equipment or machinery. You can also specify over what period you want to make the calculation. Do you want to recoup the training cost over one year or would 2 or even 3 years be acceptable?

To use the formula choose any piece of Box 2 training (see Bitesize 3) and first calculate what the cost is and, if anything, over-estimate the total cost. It is the benefit that is the crucial figure, not the cost. No businessperson will mind the cost of an investment as long as they are confident the benefit will provide an acceptable return.

Think what a 1% improvement would look like from a target audience of line managers in terms of either their revenues or costs. You will probably have to go back to the figures you produced for Bitesize 1 or 2 to do this. On the top line this becomes the gross benefit from which you must deduct the cost. What is left is the ‘net benefit’. This is then divided by the cost again, under the line, and the result multiplied by 100%.

If you can remember basic algebra from school (I know maths is not normally most trainers’ strongest subject but believe me it is easy) you can substitute the letters b (benefit) and c (cost) and re-write the equation as

or transpose it so that

ROI x C = B-C x 100%

Now, practise manipulating the formula by answering the following questions.

1. What would the net ROI be if the benefit from the training is £100,000 and the cost is £20,000?
2. If you want to achieve an ROI of 30% and you have a cost (i.e. budget) of £1000 what gross benefit must you achieve?
3. If you anticipate savings (B) of £270,000 from training managers in problem solving techniques, and you need a 50% ROI, how much can you afford to invest in the training (C)?

Usually, in practice, you will only have to answer question 1. If you are struggling the answers are shown below. Once you have mastered these you will be surprised at the astonished looks on the faces of line managers when they start to see the benefits of training so clearly, especially using a financial and accounting terminology they understand.

Answers

1. 400%

2. £1300

3. £180K

How these answers were reached: -

1. What is the ROI if the benefit is £100,000 and the cost is £20,000?

2. If you want to achieve an R of 30% and you have a budget of £1000 what benefit must you achieve?

RxC = B-C 30% x 1000 = B - 1000 300 = B - 1000 1300 = B

3. If you anticipate a benefit (B) of savings of £270,000 resulting from some training in problem solving techniques and you need a 50% ROI, how much can you afford to invest in the training (C)?

RxC = B-C 50% x C = 270,000 - C i.e. 1_C = 270,000 C = 180,000

Paul is happy to take questions and comments and can be contacted at:mailto:paulkearns@blueyonder.co.uk

Earlier articles in this series can be found at:
The Bitesize Business Partners Page