The disadvantages of relying on ROI

The disadvantages of relying on ROI
23 February 2022     2712

The disadvantages of relying on ROI

In todays business world ROI plays a very important role when it comes to decision-making. This is almost always caused by the perceived self-interest of the owner of the company.

But it is becoming more and more frequent that the managerial class points out ROI and similar metrics as the be all end all of an organization. Usually they are referring specifically to ROI because it is pretty easy to comprehend.

ROI is the current value of investment minus the cost of investment, then divided by the cost investment again.

In simpler terms: If you have invested $500 in some piece of tech equipment and now the monetary value of the asset has risen to $1000, the formula will look like this: 1000-500 / 500. This means that the ROI in question here equals 1 (or 100%).

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It is a general rule of the thumb to go for a positive ROI rate, i.e more than 0. But generally at least 1 is the go to for some companies.

The technical disadvantages of ROI

Even a quick glance at this formula reveals one of the weaker points of ROI: time. If you have gotten back a return on investment through asset price rise ROI does not take into account whether that was done in a month or 10 years.

This evidently complicates things, as it the time slots have different importance depending on the circumstances. For example, 3 months when the company is mostly idling and is in a relaxed state is much different from the 3 months that are allotted until the deadline.

To tackle this problem RoR was introduced, which takes into account time as well. But if we are discussing long-term investments we have to take into inflation. If that is calculated we have to analyze the fluctuations in purchasing power through differing periods of time. While purchasing power in general is related to inflation is it not defined wholly by inflation.

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In short whenever we try to delve deep into these kinds of seemingly simple economic formulas it turns out we have to deal with many more variables than we would assume. And to take on this task successfully we have to have some sort of education in economics itself.

Consequently, we must note that having a degree (or something along those lines) in business administration is simply not enough without some foundational basis in econ.

Instrumental disadvantage

The biggest disadvantage of ROI is connected with its instrumental use in the hands of any particular organization and not its inherent qualities.

The main goal of an organization should be to supply an important product or provide a service ethically. Working with this prescription it is hard to see where attempts at profit maximization would come in.

But considering the fact that under the capitalist system competition is the main type of relation between organizations it is not surprising that profit is on the pedestal.

The result is monopolization, violation of rights, distribution of defective products, manipulation with demand, etc.

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The role of ROI

Considering all this, it is evident that despite the systemic incentives the attempt to profit maximize comes down to the individual owner in every organization.

It is not at all surprising that specific individuals go down this route when you take into account the process of assimilation of any deviation within the system.

But if you genuinely care for your organization doing meaningful work it is imperative that you prioritize more worthwhile aims and missions.