What's Better Than ROI? How About ROA?
Here’s a scenario you may have faced or will certainly face. You have a wonderful proposal for an eLearning initiative. The learning plan is all laid out and you’ve taken inventory of what you require to make it happen. Naturally, you require some eLearning authoring tools. You probably also need some eLearning deployment technology such as tablets or laptops. And I bet you’ve even considered having some type of Learning Management System to support and manage the users.
It’s obvious you’re in need of eLearning tools and technology to support your effort. These elements, let’s just refer to them as eLearning infrastructure, are fundamental to making your initiative viable, or it just isn’t an eLearning effort. Now, all these infrastructure elements are what your leaders refer to as assets.
ROI Calculation
This is quite the list of requirements to pitch to your stakeholders. Do you think they’ll bite? If they don’t, how will you get them to see the value for your eLearning infrastructure need? Most practitioners' first instinct would be to apply some type of Return On Investment (ROI) calculation. They believe this is what their operational decision-makers expect from them for these types of tangible purchases.
Regretfully, the issue is that when practitioners attempt to apply ROI they conflate the actual learning activity with the expected future benefit of the eLearning infrastructure requirements. Operational stakeholders evaluate each of these requirements separately and differently. The learning itself is seen as an activity expensed in the period when it occurs whereas your eLearning infrastructure are tangible items expected to add value over the long term. They consider these items tangible, fixed assets. And while a proper financial ROI is a valid approach to evaluating assets, it's never an appropriate measure for the actual learning activity.
Your eLearning items are considered assets, which is simply a financial term referring to resources providing some relevant economic value over time, that your organization owns or controls with the expectation that it will provide a future benefit. More simply, assets are things that are expected to generate cash flow, reduce expenses, or improve operations in some way. Think about why you’re proposing this eLearning effort in the first place. It is to accomplish one of those things listed, otherwise why bother doing it, right?
What many practitioners don’t know, and are not expected to know (but their leaders know), is that there’s another measure available to isolate and evaluate the acquisition of learning assets (or any asset) called return on assets, or ROA. It is a more appropriate calculation for the evaluation for tangible learning investments like, say, eLearning technology and tools. If you want to impress your stakeholders, consider applying a return on asset calculation. Allow me to walk you through how it’s applied.
What Is ROA?
The term return on assets refers to a financial ratio that indicates how profitable a company is in relation to its total assets. In more basic terms, it measures the utility of company assets, related to growing its value through their contribution to the operations. Consider it this way. If you own a car, it’s because it serves you a practical utility. As such, the cost of the car (your asset) is returning a benefit: making you more efficient in what you need to do, like going to work or completing errands. This asset is providing a return.
In the same way you use your car, house, or any other asset, a company uses its assets to generate growth and a profit. Decision-makers use ROA to determine how efficiently they are using their assets. Every asset purchased must demonstrate how it can deliver value, or it’s either not purchased or is disposed of.
Most of the time, however, assets don’t directly contribute to operational profitability. Getting approval to purchase the assets in our eLearning infrastructure example will only happen if you demonstrate how they will provide some relevant economic value and future benefit for your organization. In more direct terms, your eLearning assets must demonstrate how, sometime in the future, they will either generate cash flow, reduce expenses, or improve operations in some way.
Businesses are about efficiency, so comparing profits to the resources a company uses to earn them demonstrates value for those assets. Return on assets is the simplest of such corporate bang-for-the-buck measures. This is where the return on assets calculation comes into play It’s a commonly applied financial metric used to assess the profitability and efficiency of a company's assets. From an accounting perspective, assets are reported on a company's balance sheet and classified as current, fixed, and intangible. Fixed assets, such as your eLearning infrastructure, will be acquired only if they create or increase an organization’s value, or benefit operations in some way over the long term.
Calculating ROA
While ROA can be a useful tool in evaluating asset investments, evaluating investments for eLearning technology and equipment depends on the specific context and goals of the evaluation. Since ROA calculates the ratio of net income (profitability) to total assets when it comes to eLearning technology and equipment, it’s often more about the potential impact and effectiveness of the investments, rather than solely financial returns.
An ROA figure provides internal decision-makers guidance on how effective the company is in converting the money it invests in the assets it uses into net income. The higher the ROA number, the better, because it’s expressing that the company is earning more money with a smaller investment. Put simply, a higher ROA means more asset efficiency.
ROA is calculated by dividing a company’s net income by its total assets. As a formula, it's expressed as:
Return on assets (ROA) = Net Income/Total Assets
Let’s apply this to our eLearning example. Let’s say the budgeted costs for your eLearning asset requirements amount to $100,000. And let’s assume that your company reported a net profit of $500,000 and the current asset value is $1,900,000. This means that the current ROA, without the eLearning assets, is 26%, and with the eLearning investment 25%. But you believe that the eLearning effort will realistically increase employee efficiency by $25,000 (or more) per year for the next 3 years. So, the ROA for the first year post the learning implementation is 26.25%, for year 2 it is 27.5%, and for year 3 it is 28.75%. So, all things remaining constant, your ability to deliver on the learning promise to increase employee efficiency should convince your stakeholders to invest in the learning technology.
Now, this example is a simplistic approach to show you how to apply ROA and how it works. But it’s not a complete picture. Other financial considerations factor into the calculation, such as financing requirements, opportunity costs, and other costs to purchasing the eLearning assets. Much of this falls under the guise of accounting requirements and this article isn’t meant to make you into financial experts, that’s not your role. Your role is to increase organizational value through your efforts, but this still requires some basic financial literacy. This is why it’s important for you to work with internal financial experts to develop a proper financial case.
While there is much more to the ROA conversation, it’s a common calculation applied by internal decision-makers but not often spoken about. It’s considered a more appropriate evaluation for tangible learning investments like eLearning technology and tools. If you want to impress your stakeholders, apply a return on asset calculation to your budgeting request in preference to an ROI calculation.
Want To Develop This Skill?
As you can appreciate, one article will point you in the right direction but it only scratches the surface of the positive impact your learning efforts can have on an organization. Force yourself to go deeper and grow into the value you know learning can deliver to your business. eLearning Industry is offering a course to accompany you in your professional development. Enroll in their course, "How to Sell eLearning to Internal Stakeholders" at a limited special rate.
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