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How to Determine ROI for Finance Initiatives

When considering a transformation project, finance and treasury teams need to estimate expected return on investment. Heres how.

By Berl Kaufman | Updated on January 21, 2015
Last September, in an article titled “CFOs Taking the Heat,” we examined how CFOs and corporate treasurers can understand whether their finance function needs to undertake a major infrastructure transformation. Deciding to move forward is just the first step in getting such a project under way. Once a finance team is contemplating a transformation initiative, it faces the daunting task of justifying the expenditure. Various metrics are available, including net present value (NPV), payback, and internal rate of return (IRR), but one of the best tools is an analysis of the project’s return on investment (ROI).

In the context of transformation projects, ROI is a cash flow metric that allows senior executives to make an informed decision about whether to proceed. It also provides a numerical look at various scenarios to help executives decide on the optimum approach. Creating a solid ROI analysis for a project is extremely hard to do well, but it’s well worth the effort, for both technology-focused and non-technology initiatives.

An ROI projection can inform decisions around the priority of each project deliverable and the sequence of the deliverables, and it can help deconstruct a specific deliverable into phases. The ROI figure usually presents the anticipated cash flow for the duration of the project, sometimes extending even further into the future. Figure 1 shows a simple version of a project ROI calculation—the net cash flow gain that the project should deliver, divided by the anticipated cost of the project. What this equation does not address is year-over-year (YoY) ROI, which can change drastically over the life of a transformation project. We typically see a low or negative ROI in the first six to 12 months; then the ROI escalates over the next one to three years, at which time it plateaus. Projecting the YoY ROI up front is important because capex decisions early on can influence returns throughout the course of the project.

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