ROI AND FINANCIAL MEASURES

The Use of ROI and Other Financial Measures to Assess the Performance of Organizations Are Inadequate

The Use of ROI and Other Financial Measures to Assess the Performance of Organizations Are Inadequate

Return on Investment and other financial measure (Ratios) are frequently used while measuring and evaluating the performance of the company by the management as well as investors. This over dependence on just financial measures sometimes misleads the management and investor. In my point of view ROI and other financial measures are inadequate approaches to evaluate the performance of any company. There are many other aspects that must be taken into account for performance assessment. Further in this paper we will discuss about ROI, financial ratio, their limitation and the best measure to evaluate the performance.

Return on Investment (ROI) method and performance evaluation

Even though the returns on investment (ROI) is extensively used method in evaluating performance of the companies, but at the same time it is not a perfect tool in judging an organizations performance. This financial too is subject to following inadequacies:

Just giving an objective to executives with the aim to increase ROI might not be adequate approach. executives might not be acquainted with that how to amplify ROI; they possibly will raise ROI in a manner that could be inconsistent through the organization's strategies and plans; or they can take measures that raise ROI in the short run although these actions may harm organization's long run performance for instance cutting back on the R&D budgets. This is why ROI is best used as part of a balanced scorecard (BSC). A (BSC) can give tangible guidance to executives, building it more possible that the actions taken are not inconsistent with the organizational strategies and dropping the probability that short-run performance would be improved at the cost of long-term performance of the company(Jalbert and Landry, 2003).

An Executive who runs the affairs of a business unit normally innate several committed cost on that the Executive has no control. These committed costs might be pertinent in evaluating the performance of the business unit the same as an investment however it make complicated to practically evaluate the performance of the executive comparative to other executives.

An executive who is assessed based on (ROI) might refuse investment opportunities that are lucrative for whole organization however that might have a pessimistic effect on the executive performance assessment.

Disadvantages of ROI measure

It can be with no trouble manipulated. The computation of ROI can be without doubt altered based on the analysis purpose. ROI depends on what is included in costs and revenues. For instance, we can work out Return on Investment as dividing the income that every product has produced by its respective costs that will be from the marketing viewpoint. In contrast, a financial analyst will probably divide the net profits of an investment by total value of the entire resources that were employed to create and sell the products.

As it is seen that every person have different viewpoint and would work out ROI in a different way, the ROI outcome can be articulated ...