For independent financial advisers (IFA), measuring your return on investment (ROI) is critical in ensuring overall profitability. When looking at a project, investment, client, or even your business, could one quick formula accurately capture the effectiveness and viability of this? This comes down to the well-known equation for measuring return on investment and how you can measure the true profitability of your business by keeping a few crucial influencing factors in mind.
The first step is understanding ROI and recapping the basics of measuring this fundamental metric.
Return on investment 101: an overview
Return on investment (ROI) is one of a business’s core Key Performance Indicators (KPI) and helps companies determine an expenditure’s viability. You can calculate this metric using a basic equation that indicates how much profit or loss a specific investment has earned in a percentage value. ROI is measured in percentage value as this seamlessly allows businesses to compare the profitability and effectiveness of different investment choices.
It helps businesses gauge whether or not the resources they are putting towards a specific investment will yield a significant return alongside the potential profitability. The higher the ROI percentage, the more successful the investment.
The ROI formula: Calculating and measuring ROI is relatively straightforward. The most common way to measure your ROI is by calculating the net income divided by the total cost of the investment, or ROI = Net income / Cost of investment x 100.
Measuring ROI: 3 key things to keep in mind when measuring your ROI
Measuring ROI helps businesses eliminate some of the uncertainty when working towards specific goals. However, relying on the accuracy of your ROI can be risky if you don’t keep the following considerations in mind.
Consider your cost per acquisition (CPA)
When measuring the profitability of a specific project, businesses can only partially rely on the ROI calculation. Therefore, it’s also essential to consider and quantify the CPA per client. This refers to the company’s cost to bring on a new client, including any marketing, sales, or resources used to onboard and retain a client.
Consider the limitations of measuring ROI
Measuring ROI comes with its limitations, risk assessment being one of them. Finding the potential risks in your revenue streams is critical when determining the validity and sustainability of a particular project. Although many praise measuring ROI for its simplicity, it doesn’t consider the risk potential.
Moreover, the standardised ROI formula cannot account for the time value of money, which is a significant KPI for Independent Financial Advisers (IFAs). Therefore, when calculating ROI, it’s essential to consider some of the less obvious hidden costs, fees, and resources utilised during the project, which significantly impact your ROI.
Consider your revenue stream management
Measuring your ROI hinges on your revenue stream management’s visibility, transparency, and accuracy. However, as your business grows, managing different revenue streams can be time-consuming and prone to human error. Therefore, to best determine the profitability of a project, investment, or expenditure, you need an overview of all relevant associated metrics and data in a way that’s easy to interpret.
Manage your commission and fees beautifully with Commspace
We help enable you to gain complete visibility into all commissions, fees, and additional revenue streams to measure and interpret your ROI perfectly. Commspace enables IFAs to track and manage resources, time expenditures, and additional costs in one consolidated platform.
This empowers you to highlight any risks and growth opportunities along the way. The end goal here is to receive real-time access to your data, covering your fees from every angle for optimal investment returns.
If this is something you are after, Commspace can assist with the process from start to finish. Get in touch with us today to boost your ROI and eliminate unnecessary risks and uncertainty.
