Return On Investment.docx

8/16/2019 Return On Investment.docx

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Return On Investment - ROI

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What is 'Return On Investment - ROI'A performance measure used to evaluate theefficiency of an investment or to

compare the efficiency of a number of different investments. ROI measures the

amount ofreturn on an investment relative to theinvestment’s cost. To calculate

ROI, the benefit (or return) of an investment is divided by the cost of the

investment, and the result is expressed as a percentage or a ratio.

The return on investment formula:

In the above formula, "Gain from Investment” refers to the proceeds obtained

from the sale of the investment of interest. Because ROI is measured as a

percentage, it can be easily compared with returns from other investments,

allowing one to measure a variety of types of investments against one another.

Next Up1. RETURN

2. INVESTMENT CENTER

3. PIG4. ASSET REDEPLOYMENT

5.

BREAKING DOWN 'Return On Investment - ROI'

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Return on investment is a very popularmetric because of its versatility and

simplicity. Essentially, return on investment can be used as a rudimentary gauge

of an investment’s profitability. ROI can be very easy to calculate and to interpret

and can apply to a wide variety of kinds of investments. That is, if an investment

does not have a positive ROI, or if an investor has other opportunities available

with a higher ROI, then these ROI values can instruct him or her as to which

investments are preferable to others.

For example, suppose Joe invested $1,000 in Slice Pizza Corp. in 2010 and sold

hisshares for a total of $1,200 a year later. To calculate the return on his

investment, he would divide his profits ($1,200 - $1,000 = $200) by the

investment cost ($1,000), for a ROI of $200/$1,000, or 20%.

With this information, he could compare the profitability of his investment in Slice

Pizza with that of other investments. Suppose Joe also invested $2,000 in Big-

Sale Stores Inc. in 2011 and sold his shares for a total of $2,800 in 2014. The

ROI on Joe’s holdings in Big-Sale would be $800/$2,000, or 40%. Using ROI, Joe

can easily compare the profitability of these two investments. Joe’s 40% ROI from

his Big-Sale holdings is twice as large as his 20% ROI from his Slice holdings, so

it would appear that his investment in Big-Sale was the wiser move.

Limitations of ROIYet, examples like Joe's reveal one of several limitations of using ROI, particularly

when comparing investments. While the ROI of Joe’s second investment was

twice that of his first investment, the time between Joe’s purchase and sale was

one year for his first investment and three years for his second. Joe’s ROI for his

first investment was 20% in one year and his ROI for his second investment was

40% over three. If one considers that theduration of Joe’s second investment

was three times as long as that of his first, it becomes apparent that Joe should

have questioned his conclusion that his second investment was the more

profitable one. When comparing these two investments on anannual basis, Joe

needed to adjust the ROI of his multi-year investment accordingly. Since his total

ROI was 40%, to obtain his average annual ROI he would need to divide his ROI

by the duration of his investment. Since 40% divided by 3 is 13.33%, it appears

that his previous conclusion was incorrect. While Joe’s second investment earned

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him more profit than did the first, his first investment was actually the more

profitable choice since its annual ROI was higher.

Examples like Joe’s indicate how a cursory comparison of investments using ROI

can lead one to make incorrect conclusions about their profitability. Given thatROI does not inherently account for the amount of time during which the

investment in question is taking place, this metric can often be used in

conjunction withRate of Return, which necessarily pertains to a specified period

of time, unlike ROI. One may also incorporateNet Present Value (NPV), which

accounts for differences in the value of money over time due to inflation, for even

more precise ROI calculations. The application of NPV when calculating rate of

return is often called theReal Rate of Return.

Keep in mind that the means of calculating a return on investment and, therefore,

its definition as well, can be modified to suit the situation. it all depends on what

one includes as returns and costs. The definition of the term in the broadest

sense simply attempts to measure the profitability of an investment and, as such,

there is no one "right" calculation.

For example, a marketer may compare two different products by dividing

thegross profit that each product has generated by its associated

marketingexpenses. A financial analyst, however, may compare the same twoproducts using an entirely different ROI calculation, perhaps by dividing thenet

income of an investment by the total value of all resources that have been

employed to make and sell the product. When using ROI to assessreal

estate investments, one might use the initial purchase price of aproperty as the

“Cost of Investment” and the ultimate sale price as the “Gain from Investment,”

though this fails to account for all of the intermediary costs, like

renovations,property taxes andreal estate agent fees.

This flexibility, then, reveals another limitation of using ROI, as ROI calculations

can be easily manipulated to suit the user's purposes, and the results can be

expressed in many different ways. As such, when using this metric, the savvy

investor would do well to make sure he or she understands which inputs are

being used. A return on investment ratio alone can paint a picture that looks quite

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different from what one might call an “accurate” ROI calculation—one

incorporating every relevant expense that has gone into the maintenance and

development of an investment over the period of time in question—and investors

should always be sure to consider the bigger picture.

Developments in ROIRecently, certain investors and businesses have taken an interest in the

development of a new form of the ROI metric, called "Social Return on

Investment," or SROI. SROI was initially developed in the early 00's and takes

into account social impacts of projects and strives to include those affected by

these decisions in the planning ofallocation of capital and other resources.

For a more in-depth look at ROI, see:FYI on ROI: A Guide to Calculating Returnon Investment.

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Return on investmentFrom Wikipedia, the free encyclopediaThis article is about the term in investing. For articles on other subjects having the sameabbreviation, see ROI .

This article needs additional citations for verification. Please help improve this

article by adding citations to reliable sources. Unsourced material may be challenged removed. (April 2016) ( Learn how and when to remove this template message )

Return on investment (ROI) is the benefit to an investor resulting from an investment of someresource. A high RO means the investment gains compare favorably to investment cost. As aperformance measure, RO is used to evaluate the efficiency of an investment or to compare theefficiency of a number of different investments.!"# n purely economic terms, it is one $ay ofconsidering profits in relation to capital invested.

Contents

!hide#

•

"%urpose

o "."Risk $ith RO usage

• &'alculation

o &."%roperty

o &.&arketing investment

• *ee also

• +References

Purpose!edit#

n business, the purpose of the return on investment (RO) metric is to measure, per period, ratesof return on money invested in an economic entity in order to decide $hether or not to undertake aninvestment. t is also used as indicator to compare different pro-ect investments $ithin a pro-ectportfolio. he pro-ect $ith best RO is prioriti/ed. Recently, the concept has also been applied to

https://en.wikipedia.org/wiki/ROI_(disambiguation)https://en.wikipedia.org/wiki/Wikipedia:Verifiabilityhttps://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edithttps://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edithttps://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edithttps://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edithttps://en.wikipedia.org/wiki/Help:Introduction_to_referencing_with_Wiki_Markup/1https://en.wikipedia.org/wiki/Help:Introduction_to_referencing_with_Wiki_Markup/1https://en.wikipedia.org/wiki/Help:Maintenance_template_removalhttps://en.wikipedia.org/wiki/Help:Maintenance_template_removalhttps://en.wikipedia.org/wiki/Investmenthttps://en.wikipedia.org/wiki/Return_on_investment#cite_note-Return_on_Investment-1https://en.wikipedia.org/wiki/Return_on_investment#cite_note-Return_on_Investment-1https://en.wikipedia.org/wiki/Capital_(economics)https://en.wikipedia.org/wiki/Return_on_investmenthttps://en.wikipedia.org/wiki/Return_on_investment#Purposehttps://en.wikipedia.org/wiki/Return_on_investment#Risk_with_ROI_usagehttps://en.wikipedia.org/wiki/Return_on_investment#Calculationhttps://en.wikipedia.org/wiki/Return_on_investment#Propertyhttps://en.wikipedia.org/wiki/Return_on_investment#Marketing_investmenthttps://en.wikipedia.org/wiki/Return_on_investment#See_alsohttps://en.wikipedia.org/wiki/Return_on_investment#Referenceshttps://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edit&section=1https://en.wikipedia.org/wiki/ROI_(disambiguation)https://en.wikipedia.org/wiki/Wikipedia:Verifiabilityhttps://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edithttps://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edithttps://en.wikipedia.org/wiki/Help:Introduction_to_referencing_with_Wiki_Markup/1https://en.wikipedia.org/wiki/Help:Maintenance_template_removalhttps://en.wikipedia.org/wiki/Investmenthttps://en.wikipedia.org/wiki/Return_on_investment#cite_note-Return_on_Investment-1https://en.wikipedia.org/wiki/Capital_(economics)https://en.wikipedia.org/wiki/Return_on_investmenthttps://en.wikipedia.org/wiki/Return_on_investment#Purposehttps://en.wikipedia.org/wiki/Return_on_investment#Risk_with_ROI_usagehttps://en.wikipedia.org/wiki/Return_on_investment#Calculationhttps://en.wikipedia.org/wiki/Return_on_investment#Propertyhttps://en.wikipedia.org/wiki/Return_on_investment#Marketing_investmenthttps://en.wikipedia.org/wiki/Return_on_investment#See_alsohttps://en.wikipedia.org/wiki/Return_on_investment#Referenceshttps://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edit&section=1


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scientific funding agencies (e.g. 0ational *cience Foundation) investments in research of opensource hard$are and subse1uent returns for direct digital replication. !

RO and related metrics provide a snapshot of profitability, ad-usted for the si/e of the investmentassets tied up in the enterprise. RO is often compared to e2pected (or re1uired)rates of return onmoney invested. RO is not net present value3ad-usted and most school books describe it $ith a4ear 5 investment and t$o to three years income.

arketing decisions have obvious potential connection to the numerator of RO (profits), but thesesame decisions often influence assets usage and capital re1uirements (for e2ample, receivables andinventories). arketers should understand the position of their company and the returns e2pected.!#

n a survey of nearly &55 senior marketing managers, 66 percent responded that they found thereturn on investment metric very useful.!#

Return on investment may be calculated in terms other than financial gain. For e2ample, socialreturn on investment (*RO) is a principles3based method for measuring e2tra3financial value (i.e.,environmental and social value not currently reflected in conventional financial accounts) relative toresources invested. t can be used by any entity to evaluate impact on stakeholders, identify $ays toimprove performance, and enhance the performance of investments.

Risk with ROI usage!edit# As a decision tool it is simple to understand. he simplicity of the formula allo$s to freely choosevariables e.g., length of the calculation time, if overhead cost should be included, or details such as$hat variables are used to calculate income or cost components. o use RO as an indicator forprioriti/ing investment pro-ects is risky, since usually little is defined together $ith the RO figure thate2plains $hat is making up the figure.

When long term investments take place, the need for 0et %resent 7alue ad-ustment is high. *imilarto 8iscounted 'ash Flo$ you should use 8iscounted RO instead.

Calculation!edit#

For a single3period revie$, divide the return (net profit) by the resources that $ere committed

(investment)9!#

return on investment : 0et income ; nvestment

$here9

0et income : gross profit < e2penses.

investment : stock = market outstanding!when defined as?# = claims.

or

return on investment : (gain from investment > cost of investment) ; cost of investment !"#

or

return on investment : (revenue < cost of goods sold) ; cost of goods sold

Property!edit#'omplications in calculating RO can occur $hen real property isrefinanced, or a second mortgage is taken out. nterest on a second, orrefinanced, loan may increase, and loan fees may be charged, both of$hich can reduce the RO, $hen the ne$ numbers are used in the ROe1uation. here may also be an increase in maintenance costs andproperty ta2es, and an increase in utility rates if the o$ner of a residentialrental or commercial property pays these e2penses.

https://en.wikipedia.org/wiki/National_Science_Foundationhttps://en.wikipedia.org/wiki/National_Science_Foundationhttps://en.wikipedia.org/wiki/Open_source_hardwarehttps://en.wikipedia.org/wiki/Open_source_hardwarehttps://en.wikipedia.org/wiki/Open_source_hardwarehttps://en.wikipedia.org/wiki/Return_on_investment#cite_note-2https://en.wikipedia.org/wiki/Profitabilityhttps://en.wikipedia.org/wiki/Profitabilityhttps://en.wikipedia.org/wiki/Rates_of_returnhttps://en.wikipedia.org/wiki/Rates_of_returnhttps://en.wikipedia.org/wiki/Net_present_valuehttps://en.wikipedia.org/wiki/Return_on_investment#cite_note-Marketing_Metrics-3https://en.wikipedia.org/wiki/Return_on_investment#cite_note-Marketing_Metrics-3https://en.wikipedia.org/wiki/Social_return_on_investmenthttps://en.wikipedia.org/wiki/Social_return_on_investmenthttps://en.wikipedia.org/wiki/Stakeholder_(corporate)https://en.wikipedia.org/wiki/Stakeholder_(corporate)https://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edit&section=2https://en.wikipedia.org/wiki/Discounted_Cash_Flowhttps://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edit&section=3https://en.wikipedia.org/wiki/Return_on_investment#cite_note-Marketing_Metrics-3https://en.wikipedia.org/wiki/Net_incomehttps://en.wikipedia.org/wiki/Net_incomehttps://en.wikipedia.org/wiki/Wikipedia:Manual_of_Stylehttps://en.wikipedia.org/wiki/Wikipedia:Manual_of_Stylehttps://en.wikipedia.org/wiki/Wikipedia:Manual_of_Stylehttps://en.wikipedia.org/wiki/Return_on_investment#cite_note-Return_on_Investment-1https://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edit&section=4https://en.wikipedia.org/wiki/Mortgagehttps://en.wikipedia.org/wiki/Mortgagehttps://en.wikipedia.org/wiki/National_Science_Foundationhttps://en.wikipedia.org/wiki/Open_source_hardwarehttps://en.wikipedia.org/wiki/Open_source_hardwarehttps://en.wikipedia.org/wiki/Return_on_investment#cite_note-2https://en.wikipedia.org/wiki/Profitabilityhttps://en.wikipedia.org/wiki/Rates_of_returnhttps://en.wikipedia.org/wiki/Net_present_valuehttps://en.wikipedia.org/wiki/Return_on_investment#cite_note-Marketing_Metrics-3https://en.wikipedia.org/wiki/Return_on_investment#cite_note-Marketing_Metrics-3https://en.wikipedia.org/wiki/Social_return_on_investmenthttps://en.wikipedia.org/wiki/Social_return_on_investmenthttps://en.wikipedia.org/wiki/Stakeholder_(corporate)https://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edit&section=2https://en.wikipedia.org/wiki/Discounted_Cash_Flowhttps://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edit&section=3https://en.wikipedia.org/wiki/Return_on_investment#cite_note-Marketing_Metrics-3https://en.wikipedia.org/wiki/Net_incomehttps://en.wikipedia.org/wiki/Wikipedia:Manual_of_Stylehttps://en.wikipedia.org/wiki/Return_on_investment#cite_note-Return_on_Investment-1https://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edit&section=4https://en.wikipedia.org/wiki/Mortgage


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'omple2 calculations may also be re1uired for property bought $ith anad-ustable rate mortgage (AR) $ith a variable escalating rate chargedannually through the duration of the loan.

Marketing investment!edit#

arketing not only influences net profits but also can affect investment

levels too. 0e$ plants and e1uipment, inventories, and accounts receivableare three of the main categories of investments that can be affected bymarketing decisions.!#

RoA, Ro0A, Ro', and Ro', in particular, are similar measures $ithvariations on ho$ ?investment? is defined.!#

4es, here Really Are Ways Of @valuating 'hannelncentive RO%osted on anuary &B, &5"B by 'hannel arketer Report in 'hannel %rograms, 'hannel

RO, 'hannel7ie$s, Featured %osts

By Dan Hawtof, Blackhawk Engagement Solutions

'hannel marketers offer a constant variety of incentive programs to motivate behaviors across the board, from

head1uarter principals and sales reps to sales engineers, distributors and anyone else they can reach. hey do it $ith

*%Fs, deal registration programs, seed3unit discounts and more, all designed to re$ard for specific sales and non3

sales activities.

And channel marketers are good at it. 4ou kno$ this, since you probably are one. Cut measuring the individual or

cumulative RO on those effortsD hatEs a little different story. iven the comple2ity of channel programs, and the

difficulty of obtaining reliable reporting, you may have simply given up trying to determine $hatEs $orking, $hatEs not

and $hy. Cut donEt feel bad9 WeEve all been there.

https://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edit&section=5https://en.wikipedia.org/wiki/Net_profithttps://en.wikipedia.org/wiki/Net_profithttps://en.wikipedia.org/wiki/Return_on_investment#cite_note-Marketing_Metrics-3https://en.wikipedia.org/wiki/Investmenthttps://en.wikipedia.org/wiki/Investmenthttps://en.wikipedia.org/wiki/Return_on_investment#cite_note-Marketing_Metrics-3https://en.wikipedia.org/wiki/Return_on_investment#cite_note-Marketing_Metrics-3http://channelmarketerreport.com/2016/01/yes-there-really-are-ways-of-evaluating-channel-incentive-roi/http://channelmarketerreport.com/author/cmr411/http://channelmarketerreport.com/author/cmr411/http://channelmarketerreport.com/author/cmr411/http://channelmarketerreport.com/category/topics/channel-programs-topics/http://channelmarketerreport.com/category/topics/channel-programs-topics/http://channelmarketerreport.com/category/topics/channel-programs-topics/http://channelmarketerreport.com/category/topics/channel-roi/http://channelmarketerreport.com/category/topics/channel-roi/http://channelmarketerreport.com/category/topics/channel-roi/http://channelmarketerreport.com/category/special-features/channelviews/http://channelmarketerreport.com/category/special-features/channelviews/http://channelmarketerreport.com/category/featured/http://channelmarketerreport.com/category/featured/http://www.bhengagement.com/https://en.wikipedia.org/w/index.php?title=Return_on_investment&action=edit&section=5https://en.wikipedia.org/wiki/Net_profithttps://en.wikipedia.org/wiki/Return_on_investment#cite_note-Marketing_Metrics-3https://en.wikipedia.org/wiki/Investmenthttps://en.wikipedia.org/wiki/Return_on_investment#cite_note-Marketing_Metrics-3http://channelmarketerreport.com/2016/01/yes-there-really-are-ways-of-evaluating-channel-incentive-roi/http://channelmarketerreport.com/author/cmr411/http://channelmarketerreport.com/category/topics/channel-programs-topics/http://channelmarketerreport.com/category/topics/channel-roi/http://channelmarketerreport.com/category/topics/channel-roi/http://channelmarketerreport.com/category/special-features/channelviews/http://channelmarketerreport.com/category/featured/http://www.bhengagement.com/


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*o hereEs the good ne$s. here really are proven methods of demonstrating channel incentive RO in 1uantifiable,

meaningful terms. WeEll take a high3level look at three of them here. 8iligently applying these practices can go a long

$ay to$ard transforming your programs from a reluctant Gcost of doing businessH into a reliable engine delivering

real3$orld results.

he est Control Comparison Method: his method involves evaluating the performance of t$o like groups, similar in every $ay e2cept the variable youEre testing for I your incentive program. Cehaviors are compared during the test

period, and the difference in sales performance determines the effectiveness of the program. here are formulas for

determining group si/e based on the desired level of accuracy, but a good rule of thumb is &>J percent of your

channel population. here are also formulas for evaluating performance and profitability9

Sales Program Performance : (total K sales of test group;L partners in the test group) > (K sales of control group;L

partners in the control group). his calculation compares the average impact on sales per channel partner bet$een

the t$o groups.

Profitabilit Program Performance : (program performance on sales) M (gross profit margin) > (variable costs of the

program, or the amount paid in incentives).

he !ehavioral Impact Method: his method employs Gincentive engineering,H in $hich the focus e2pands from the

sale itself to the pre3 and post3sale behaviors you $ish to re$ard. ake a list of the key behaviors practiced by your

most successful channel partners, and add others youEd like to encourage, such as training or improving pipeline

visibility through deal registration. hen assess the relative importance of each behavior, and ho$ often you $ant it to

occur. his gives you the foundation for allocating your incentive budget, $ith the re$ard value for each behavior

aligning $ith the effort re1uired and its contribution to the final sale.

he "ualitative Insights Method: Want to kno$ ho$ your channel partners perceive your programEs effectiveness

and administrative processesD Ask them. hese are key insights, because the ease of doing business (@O8C) $ith a

vendor plays a critical role in $hy your channel partners are participating (or not). 'apture the information by

conducting in3depth intervie$s $ith open3ended 1uestions. 4ou can also distribute a survey to your broader partner

universe. o ma2imi/e participation, provide 1uantifiable responses such as true or false, multiple choice, ">J

rankings, etc. inimi/e bias by using an e2perienced survey designer.

deally, youEd take advantage of all three methods, since each one provides a different set of data. No$ever, these

procedures are more comple2 than can be described here, and each has its o$n set of challenges. For a fullere2planation of these methods, do$nload our $hitepaper .

ake the time to understand them in greater depth before putting them into practice. 'onducted properly, you may be

pleasantly surprised by ho$ much valuable insight can be e2tracted from traditionally hard3to3measure channel

incentive programs

http://www.bhengagement.com/capture-qualitative-insights-to-boost-your-channel-program-roi/http://www.bhengagement.com/capture-qualitative-insights-to-boost-your-channel-program-roi/


9/32

How is the return on investment calculated for FMCG

distributor?

3 Answers

Dharvesh Ks

5k Views

Simple Calculation !!

Assume FMCG company gives margin of 10 % as gross margin . istriutor "as only one

pro#uct. Applicale only all transactions "appens in an# $F& no cre#it is involve#.

'nvestment ((( Stoc) investment* Closing Stoc) + lying in go#(o,n-* stoc) in transist*

Claims from t"e company

Fie# penses ( Rent * /ages * Au#itor fee tc + RS 10000-(((A

ariale penses (#iesel * *A& * miscellaneous + Rs 12000-((((

Suppose #istriutor #oes usiness of Rs 34004000 as turnover

10 % margin Comes to Rs .30000

so 30000(epenses +52000-+A*-6 Rs 12000 is t"e net profit

'f istriutor "a# to invest Rs 700000 as a initial investment

R8'666 $etprofit9 &otal investment666:1200097000006666:2 % Per mont"

https://www.quora.com/profile/Dharvesh-Kshttps://www.quora.com/profile/Dharvesh-Ks


10/32

/"en you calculate for t"e ,"ole year 2 % ; 15 6 incentive earne# from company.

penses6 ,are"ouse rentals* manpo,er #e#icate# * ve"icle running cost* ot"ers

investment6 +stoc)s from company * cre#it in mar)et * investment in offices assets *

ve"icle #o,n payment- (co cre#it.

Most of t"e companies in 'n#ia for turnover less t"an 2 cr per annum offer aroun# 53% per

annum return

Written Aug 3, 2015

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Vikas Chandra, Student

1.5k Views

https://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributor/answer/Dharvesh-Kshttps://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/profile/Sanjay-Mishra-102https://www.quora.com/profile/Sanjay-Mishra-102https://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributor/answer/Sanjay-Mishra-102https://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/profile/Vikas-Chandra-1https://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributor/answer/Dharvesh-Kshttps://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/profile/Sanjay-Mishra-102https://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributor/answer/Sanjay-Mishra-102https://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/How-is-the-return-on-investment-calculated-for-FMCG-distributorhttps://www.quora.com/profile/Vikas-Chandra-1


11/32

Anot"er ,ay to loo) at it is?

R8' for an S@ 6 +&"roug"put9&ruly ariale cost-;uffer Stoc)

,"ere &roug"put6 Selling Price(&ruly ariale cost

Calculating Dealer ROI

his post is co3authored $ith my good friend 0ishit anatra $ho is currently the A* of %un-ab,

P for 'avinPare. Ne interned $ith me at Q?Oreal and graduated from M, Chubanesh$ar. Ne

en-oys troubling the %akistani army by attempting to cross over the border from time to time and

is giving their economists nightmares as he contemplates to sell 'hik shampoo across the

border o$ing to the kindness of his boss.4ou can find him here.

*o probably the first thing that your distributor;dealer;stockist is going to tell you $hen you go to

him for the first time is G*ir-ee, RO nahin baith raha haiH. What this simply means is that he is

challenging you to calculate his return on investment.

his is sort of a monthly e2ercise > he kno$s that he is getting an RO, else he $ould not be in

the business. What he simply needs is some ego massage so that he gets an QQ*O0 that he

is in control of something $hen he is not > your rates are fi2ed, your schemes are fi2ed, and so

are your claims. While RO is something that they teach us in first day of C3*chool, calculating

dealer RO might be a different ball game altogether as he is a $easel $ho is going to try

different permutations and combinations to get the better of you. 8o this properly $ith him, and

he (and you C8@;*O $ho is t$ice your age but earns half as much) $ill respect you forever.

he e1uation is simple > Return;nvestment, Return : (@arnings > @2penses).

https://www.facebook.com/nishit.ganatra.7https://www.facebook.com/nishit.ganatra.7https://www.facebook.com/nishit.ganatra.7


12/32


13/32

8irect @2penses are those that the dealer incurs e2clusively for the company concerned.

And ndirect @2penses are those that the dealer incurs in totality for the companies for $hom

the resource;s is;are being shared.

he only rule in calculating e2penses is that you need to take into account the part of e2penses

that he is incurring for your company alone. We $ill see ho$ $e do it belo$.

&. *imilarly the second trick lies in $ro$erl calculating the denominator, i.e &et Investment.

A dealerEs investment comprises of parts 9 Average *tock that lies in his godo$n, Average

arket 'redit that he e2tends Average 'laims Outstanding,

Nence,

nvestment : Avg 'losing *tock = Avg arket 'redit = Avg. 'laims Outstanding

Nere the usual suspect $here one may go $rong in calculating nvestment is the first variable

i.e. Average 'losing *tock of the dealer.

A layman $ould take the month3end closing stock as the average closing stock for the dealer, or

$orse if you do the mistake of asking the dealer $hat his closing stock is, the beast $ould tell

you a figure $hich $ill be his all time high closing stock in a month.

he typical trend in F' is that ma-ority of %ushing, also kno$n collo1uially as GthoknaH

(%rimary) and %ulling (*econdary) happens in the last $eek and therefore the last $eek is not atrue indicator of the entire monthEs activity then $hy consider last $eekEs closing stock as his

monthEs closing stock. (o clarify, primary is $hat your company bills to the dealer and

secondary is $hat your dealer bills to the retailer)


14/32

'onfusedD, $e $ill deal $ith it $ith simplicity. 'onsider this as the trend of %rimary *econdary

for a dealer in a +3$eek cycle of a month

W@@P O%@00*O'P %RAR4 *@'O08AR4 'QO*0*O'P

" J, 55,555 J5,555 ",55,555 +,J5,555

& +,J5,555 ",55,555 &,55,555 ,J5,555

,J5,555 &,J5,555 &,J5,555 ,J5,555

+ ,J5,555 J,J5,555 +,55,555 J,55,555

he above table is ho$ a dealerEs inventory in a typical F' set3up $ould behave like, i.e.

ma-ority of activity happening in the last $eek and hence one $ould be $rong in taking J,55,555

(Week3+ 'losing *tock) as the average closing stock for that dealer in that month.

he better $ay to do it is to take an average of all + $eeksE closing stocks. n this case it $ould

come out to be as 9 ( +,J5,555 = ,J5,555 = ,J5,555 = J,55,555) ; + $hich e1uals to +,"&,J55

$hich is lesser than the previous result and hence his investment goes do$n and Ro goes up.

@nough of this gyaan no$, let us get straight do$n to calculating a sample RO

%remise9

r. Atul ittal is the proud o$ner of his distribution firm ;* Chagat Ram $ala %rasad. Nis firm

deals $ith distributing + companies in total of $hich AC' %vt. Qtd. s one for $hich $e need to

calculate the Ro. he firm has " dedicated (e2clusive) salesmen $orking for AC' %vt. Qd. $ith

a monthly salary of 0R B,555;3 per month per salesman. Apart from this, the firm also has an

accountant3cum3manager $ith a monthly salary of 0R J,555;3 per month, pays a monthly rentfor the godo$n $hich comes to 0R J,555;3 per month, incurs electricity miscellaneous costs

(supply units, chai3paani etc.) to the tune of 0R J,555;3 per month. Other e2penses such as his

sonEs education and his daughters marriage $hich your dealer $ould $ant to include are not to

be included.


15/32

'll figures are assum$tions

onthly Cusiness (urnover) inclusive of all + companies9 &5,55,555;3U

onthly Cusiness (urnover) of AC' %vt. Qtd. 9 T,55,555;3

AC' %vt. Qtd.Es 'ompany argin9 TS

Average arket 'redit for AC' %vt Qtd. s "5,555;3 0R

Average 'losing *tock for AC' %vt. Qtd is $orth &,J5,555;3 0R

Average 'laims Outstanding in AC' %vt. Qtd. s $orth "5,555;3 0R.

Nence going by the formula9

Ro or Return on nvestment : Returns; 0et nvestment

Returns : @arnings > @2penses

@arnings : ross argin that the dealer en-oys (sually BS 3 TS in F' companies)

@2penses : 8irect @2penses = ndirect @2penses

QetEs calculate each element one by one9

@arnings : ross argin : TS of monthly turnover of AC' %vt. Qtd. $hich is : B+,555;3

@2penses : 8irect @2penses = ndirect @2penses

8irect @2penses : *alary of @2clusive *alesmen : "VB555 : B555 per month

ndirect @2penses for AC' %vt. Qtd.:( 'ontribution of AC' %vt. QtdEs urnover to otal urnover)

V otal ndirect @2penses

otal ndirect @2penses : odo$n Rent = anagerEs *alary = iscellaneous @2penses : J,555

= J,555 = J,555 : "J,555;3


16/32

'ontribution of AC' %vt. QtdEs urnover to otal urnover : T,55,555;&5,55,555:+5S

Nence, ndirect @2penses for AC' %vt. Qtd. : +5S of "J,555;3 : B,555;3

herefore otal @2penses : B,555 = B,555 : "&,555

Nence Returns : @arnings > @2penses : B+,555 > "&,555 : J&,555

0et nvestment : Avg. 'losing *tock = Avg. arket 'redit = Avg. 'laims Outstanding :

&,J5,555 = "5,555 = "5,555 : &,65,555

herefore Ro : Returns;0et nvestment : J&,555;&,65,555 : ."&J or ".&JS

*hare hisX

8 1 0 Google +0

42 comments:

1.

Anupriya June 14, 2012 at 8:50 PM

Just a point here....when you look at his investment in stock - one

should always check whether he has taken bank loan. if he has then his

actual capital investment is actually only to the extent of his own

money. rest is interest which is part of expenses. a lot of dsitributors

conveniently miss out this part of the equation. and for big distributors

this makes a big difference in !".

#imilarly$ if the distributor has a good overdraft facility then he actually

pays for the stocks to the company from that and not his actual

investment. here again interest should be added into his expenses and

the investment reduced by the overdraft amount.

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17/32


18/32

4.

Kaushik June 14, 2012 at 11:33 PM

Thanks 6iran' (uly noted. Please feel free to contribute in the further

posts also'

5.

Sambhav Jain June 14, 2012 at 11:48 PM

7ery 8ell 9xplained.'Thanks

.

Ashish Shah June 15, 2012 at 12:05 AM

7ery helpful. & much needed initiative. Thanks 6aushik' )*

".

Tirthadeep Dhar June 15, 2012 at ":02 AM

:rilliantly explained - #ubbu and 2ishit' " remember looking forsomebody or something to teach me this$ about a year back. That my

dist. ridiculed me abt not knowing my !" calculation was the %push

comes to shove% part.

;owever$ lets not forget a very important parameter of credit given by

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19/32

the company to the distributor which can range from , to anything.

#o if 6aushik

you had aced that$ 2ishit you could share too... btw sup with you?*

@*&ll distributors are swines with hair coming out of all their holes..

Ausayin....they might not squeal but they do grunt a lot. #omebody has

got to tell these kids that... 2ishit you could elaborate " guess >thisinference from ur fb statuses*

&nd excellent explanation 6iran... was thinking abt that while reading

the article.


20/32

hey TiTo$

hw u doing man....

points noted dude....the upcoming posts will only highlight the point

number @ that u ve mentioned.

may be we could come up with a post about how to tinker o" to get

back distributor%s interest provided he is sitting on a lesser o"...

would urge you also to contribute...and about explaining credit$

wholesale discount$ we intentionally didn%t go into the detail to avoid itfrom getting complicated...

nevertheless thanks for the feedback.


21/32

Thanks &ll of you.

re$

amber verma

11.

Kapil Gupta &e%ruar' 8, 2013 at 4:2 AM

ealy good explained ....Thanxxxx

12.

Robin Godara ishnoi &e%ruar' 21, 2013 at !:4 AM

thanks dear

13.

vibhor srivastav Marc( 4, 2013 at 12:0 AM

very helpful.....thanks....for explanation of !" insuch a way....

thanks.............

14.

avik das Marc( 20, 2013 at 10:51 AM



22/32


23/32

2.

Siva Januar' 28, 2014 at 3:13 AM

0k profit out of 0.=1 investment is only fictionally possible

1.

Ankit D!ivedi April 12, 2013 at :2" AM

avik das......if no expenses are there then

case +) roi is F/

case 0) roi is =.0/

case @) roi can%t calculate....... because there are no investment.

1.

sam Dece$%er 18, 2013 at 1:5! AM

please show the working for case 0 please...

1".

Davidra"a J # Sam June 15, 2013 at 10:32 PM



24/32

hi &nkit could you please explain the second case..

(avid

18.

Rhishabh Surit June 28, 2013 at 11:32 PM

davidraAa....

if market credit is given for = days.. then average market credit would

be =/ of inventory$ thus total invenstment wud turn out to be G.0lac..hence !" wud turn out to be =.+/ >guys plE correct if im wrong .. not

from fmcg background*

1!.

""kl"l" Jul' 23, 2013 at 1:45 PM

This comment has been removed by the author.

20.

$unish Kaul Jul' 23, 2013 at 1:52 PM

aa you are very close to being right if market credit 3 0. lac

for = days market credit 3 =/ of inventory

3 =4+,,50$,,,, 3 +$H=,,

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25/32

total investment would be 3 0$,,,,I+$H=,, 3G$@=,,

margin is @/ of sale of +,$,,,, 3 @,,,,

so$ eturn on investment is 3 returns4total investment

ie ) @,,,,4G@=,, which comes out to be F.H / or you can say =/

but how come you came to conclusion that average market credit for =

days 3 =/ of inventory cost ???

1.

$adhav Augu)t 11, 2013 at 2:4 PM

" believe$ he has not taken it as =/..but..for @, days..stock is 0.

lacks..so for = days it%s 0. lacs5 =4@,3H@,,....#o net

investment in inventory30$,,,,-H@,,3+D+=,,.....#o$roi comes to be F.=/.." think so...

2.

chandan kumar bal #epte$%er 10, 2013 at 1:24

AM

;i what is the healthy !" for Bas u toldmargin is between F/-H/*? "s it between +G/-0G/?

3.

Ayush *+e$%er 1!, 2013 at 8:08 AM

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26/32

@, days inventory is 0. 1akhs

so we can calculate inventory for 0@ days which comes out to be

>0,$,,,4@,*50@3+D+$FF=

then final investment3 +D+$FF=I0,$,,,3 GG+$FF=

!"3 9arning42et "nvestment

3>@,,,,4GG+$FF=*5+,,

3F.=/

21.

vicky *+e$%er 13, 2013 at 2:3! AM

;" can any one confirm the standard norms for the !" K "nvestment.

"f some one having please share L vikasmendiLgmail.com

22.

ipin hanushali &e%ruar' ", 2014 at !:14 AM

can anyone clear my following doubt

"nvestment include &vg


27/32

pranoy paul April 10, 2014 at 12:05 AM

thanks dear

24.

Kaps Ma' 11, 2014 at 2:51 AM

This comment has been removed by the author.

25.

Kaps Ma' 18, 2014 at 11:42 PM

;i..


28/32

0nd method 0G,,,,,4,,,,,, 3 G.H rotations $ 9arning per rotation H

/ hence annual oi will be >H5G.H* 3 @H.G/ only

1.

Alpha Ma' 4, 201 at !:32 AM


29/32

30.

Adarsh #epte$%er 12, 2015 at 12:40 AM

8as going through the comment section and found someone

mentioning interest charges on


30/32


31/32

*itin Paran=ape, inu)tan nileer>) C-O, told $oneycontrol: ?In a $ar6et


32/32

Lets say you buy something for Rs. 10000/- and sell it for Rs. 10200/- after a month then the profit you

made in one month is Rs. 200/-

So return on investment = 24%

Let me explain how:

Returns per month = Rs. 200

Formula for ROI = (Profit * 100) / (Investment * no. of years)

==> ROI = 20000 / (10000 * 0.083)

1 Month in terms of years = 0.083 (1/12)

therefore ROI = 24%

This ROI is the gross ROI.

Lets say you have to pay electricity bill and rent of Rs. 100 for that month then your net ROI is 12%

This 12% is your realized return on investment whereas 24% is your total return on investment

Documents

Return On Investment.docx