Step 4: Crunch the Numbers (Part 2 of 2)
1. Calculate Return on Investment (ROI)
As we have been restating, you must constantly be checking with your organization to use the language, calculations and presentation formats that are expected. The same rule applies here. There are many ways of calculating "ROI" and people are pretty wreckless with how they throw this term around.
Step one is to determine how ROI is preferred to be calculated by the audience you are presenting your proposal to. How do they want to see it? There may be more than one preferred method depending on different decision-makers. This Investopedia explainer video reviews a simple payback example.
The most common calculations used in business cases include the following. These may be familiar to you which means you can do the calculations yourself. Or they may be new which means you should learn the basics, give it a shot and get a colleague to check your work.
Each is used in different circumstances and is preferred by different people (see chart below). Find out what is preferred by the person/people you will be pitching to.
More advanced and nuanced calculations
There are many ways to calculate the potential performance of an investment. Besides the above, there is return on assets, return on inventory and an almost innumerable other set of variations. Find out what ROI information successful proposals in the past have used. And find out what unsuccessful proposals have done. Copy and even improve on the former, and run from the latter.
2. Account for Risks...and Good Fortune
Finally, consider the possible threats (and good fortune) that your project might encounter. How would they change your numbers? Doing an honest job of accounting for risks and good fortune will sharpen your understanding of what you are proposing and build credibility and trust.
Identify Risks and Possible Good Fortune
What might go wrong? What might go really right? Usually risks and good fortune occur in one or more of the following areas:
People - what if a key team member leaves the organization? Or what if you are able to land the perfect outside expert or partnership?
Social/Environmental Impact - what if the product or process creates a safety concern internally or a labor rights issue in the supply chain? what if a certain chemical of concern can be eliminated and more costs can be eliminated than expected?
Technology - what if unexpected barriers and delays occur during adoption of the new technology? What if operating costs are higher than calculated?
Quality - what if the new software or work process doesn't perform as expected? Or what if it improves productivity in unexpected ways?
Customer - what if consumer demand exceeds supply? Of what if it is much lower than projected? What if we get more returns than expected?
Estimate these risks and determine their relative impact and probability of occurrence. You can use a 2x2 matrix like the one shown below:
Go Back and Change Your Numbers: High, medium and low
Now translate the most probably and impactful risks and opportunities into numbers. This may be difficult in some instances but do your best and document how you made your calculations.
I recommend have ROI calculations that reflect a high, medium and low estimate. Sometimes I will even name the scenarios to create a narrative around it and capture the imagination.
Speaking of capturing the imagination. Now you are ready to pitch your idea.
Next....Step 5: Pitch it!