1. Considering the laissez-faire origins of modern capitalism, it makes sense that Milton Friedman, a prominent economist during the latter half of the 20th century, claimed the only social responsibility of a business was to increase its profits.
2. His view favored the Return on Investment (ROI) which is still a popular way to measure the profitability of an asset.
3. However, ROI only looks at financial benefits of a business decision and ignores things like:
a. Customer satisfaction
b. Employee retention
c. Regulatory compliance
d. Environmental sustainability
4. However, the return on value (ROV) considers a venture’s monetary and non-monetary benefits.
5. Like how an increase in the production of goods to meet a quarterly financial goal, will affect employee productivity in the following months.
6. Let us look deeper at ROV and how businesses can use it to make investment decisions that grow customer and employee loyalty – without exploiting humans or the environment.
WHAT IS ROV?
1. ROV (Return on Value) involves thinking about the financial and non-financial values that come from making a business decision.
2. ROV = (Revenue – Cost) / Value
3. If the campaign generated $1 million in revenue and cost $500,000, the ROV would be $2.
4. For every dollar invested in the campaign, the business generated $2 in value.
5. We can use a similar equation to assess the profitability of non-financial investments, except the ‘value’ would be non-monetary.
6. Say a business invests in a meditation training program for employees; We calculate The ROV by looking at the Increase in Productivity minus the program cost.
7. ROV = (Increase in Productivity – Cost) / Value
8. If the meditation training resulted in a 10% increase in employee productivity and cost $100,000, the ROV would be $9.
9. The business generated $9 in value for every dollar invested in the program.
10. This approach to measuring the value of an investment is far more holistic than only assessing a venture’s monetary benefit.
11. In fact, a common framework used to determine ROV considers the environmental, social, and governance (ESG) cost of any operational choice.
12. Looking at a business decision’s impact on waste production, gender issues, and adherence to state or national regulations helps employees and entrepreneurs understand the broader impact of an investment.
What is
the Return on Investment (ROI)?
1. ROI is a financial metric; it looks at a venture’s monetary profits or losses relative to the amount initially invested.
2. The calculation generally includes:
o The amount you currently spend (monthly or yearly).
o The amount you plan to spend (monthly or annual) after the project ends.
o The amount you need to invest in executing the project.
3. The most common way to assess the money made on an investment is to subtract the venture cost from the revenue, then divide it by the venture cost.
4. ROI = (Revenue – Cost) / Cost
5. It’s important to note that this formula can be adapted to fit the particular needs of an investment.
6. Here’s another example:
o You spend $200,000 on operations per month.
o After the project ends, you plan to spend $175,000 on monthly operations.
o The cost of the project is $75,000.
o Your cost savings per month is $25,000.
o Take the cost savings divided by the project cost, and you get 3 – it will take three months to get a return on your investment (ROI).
What is so Bad About ROI?
1. We understand that calculations are more complex in the real world.
2. Some projects, like constructing an apartment block or launching a product, have a very long ROI period – it can take years to see any return on your investment.
3. This may make stakeholders antsy, causing some entrepreneurs to shorten deadlines or favor cheaper materials.
4. This can cut production time or quicken profit margins, but may take a toll on employee well-being and wreak havoc on the environment, costing more money in the long run!
5. The Health Action Council suggests mental health issues like anxiety, depression, and exhaustion drain $152 billion from U.S. companies and $1 trillion in productivity losses in businesses worldwide.
6. While the Green Business Bureau says using energy-efficient equipment or water-saving devices keeps long-term costs low.
7. Otherwise known as Consistent Delivery of Value, this approach captures the value of an investment over time: it allows businesses to compare assets, basing decisions on which will generate the most consistent returns.
The
Holistic Nature of ROV as a Profitability Measure
1. As the world becomes interconnected, stakeholders, like customers, employees, and investors, are increasingly interested in business activities’ social and environmental impacts.
2. Companies that demonstrate a commitment to generating an ROV for their stakeholders by considering the ESG ramifications of business decisions, are more likely to attract investors or retain talent, which is great for scaling practices and products.
Take a
look at some data on ROV business models:
1. An increase in the likelihood of funding:
o The 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey found that 72 percent of investors questioned, conducted an in-depth review of a company’s ESG disclosures before making financial decisions.
2. Recruiting the best talent:
o A survey by the Society for Human Resource Management found that a company’s ESG impact is essential to 41 percent of all U.S. workers, 46 percent of Generation Z, and 55 percent of millennials.
3. Keeping the best talent:
o The same survey found that 86 percent of employees at businesses with ESG-related goals, reported feeling proud to work there and said the company’s values made their job more meaningful; they wanted to keep working there.
4. Networking:
o By measuring ROV, businesses are held accountable for their actions and ensure they create value for all their stakeholders.
o Increased accountability can also lead to improved networking opportunities.
5. Analysis of Alternatives:
o ROV can help businesses compare different investments and base decisions on which will generate the most value.
o This is especially important in today’s environment of limited resources and increased competition.
o In fact, Business Insider lists ROV as the number one way companies can get a reasonable price for what they offer the marketer in a highly saturated market.
Source:
https://www.agileseventeen.com/return-on-value-versus-return-on-investment/
