Introduction
Return on investment (ROI) is usually the yardstick of efficiency of investment, either it can compare the variety of investments; it is a profitability measure which is mostly used to evaluate companies performance. ROI is usually depicts the rate of profits or incomes. In most cases these are either realized or not. Expenses are not considered in calculation of ROI, tax is a cost and in most cases it depends on geographical location.
Tax consumes profits and income. On calculating the efficiency of Rate of Investments. Return on investment is divided by the cost of the same investment to the ratio or the percentage of the ROI. The use of these measures gives a decision whether to continue with the investment or not to. When ROI is positive one can continue or if there are other investment with greater ROI the former can be taken and the later foregone in a bid for the best alternative. ROI then is the amount of profit or cost savings realized by an enterprise. Return on investment also can be used to determine the efficiency of enterprise managing.
Research question
The rate of return on advertisement in business is the rate of financial increases or loses gained when the management invests on business adverts to increase sails. These returns can be on the bases of past or current investments, estimates on future returns can also be taken. Advertisement cost is taken valued annually. There are several ways to determine ROI being the most common profitable ratio. ROI should not at any one time be confused for the return on owner’s equity.
Theoretical framework
As a performance measure ROI is usually the factor of evaluating efficiency of investments. In measuring the general cash/profit can be got on advertisement or the loss that is incurred. Cash flow in investment policy will always be classified as profit, interest, dividends, or capital gains/loss. Capital gain comes with an increment of market value, which has positive impact on business from advertisement results. On the other hand a capital loss will come with a decrease of market resale value I. e declining market value a negative reflection of advertisement this can be as a result of poor advertisement approaches.
ROI can be calculated with the following methods; logarithmic or continuously compounded returns, Arithmetic returns and annual returns. The calculations of ROI on advertisement on business also have various applications. Investments on advertising carry some significant risk of loss of some of the invested capital. Capital increases and losses in most cases on stock share the value of stock depends on several factors. Advertisement on stock share is considered as expenses that will be evaluated ones the stock shares are sold and the company receives its capital from the stock purchaser. This is the capital it uses on its daily operations. These stock shares find their ways from the original investors to other investors. (Edward, 2000)
Logarithmic or continuously compounded returns; It clearly includes positive and negative percentage returns. The use of the natural log is given by the formula
Vi is the initial investment value
Vf is the final investment value
ROILog =Ln(Vf /Vi)
ROILog > 0 is profit
ROILog < 0 is a loss
Doubling occurs when ROILog =Ln(2)
Total loss occurs when. ROILog →∞
Arithmetic returns
Arithmetic value is given by subtracting initial value of advertisement from final value of advertisement then dividing the answer by initial value.
Where:
Vi is the initial advertisement value and
Vf is the final advertisement value
ROIArith=❨Vf -Vi❩/Vi
This return has the following characteristics:
ROIArith = + 1 when the final value is twice the initial value
ROIArith > 0 when the advertisement is profitable
ROIArith < 0 when the advertisement is at a loss
ROIArith = − 1 when advertisement can no longer be recovered
Annual returns; this gives returns on advertisement for a period of one business year. These calculations give an annualized cash flow over a period that is set by the management I. e. quarterly or even monthly
After Tax; this is when you multiply the rate of return by the tax rate later subtract that percentage from rate of return.
The ROI is used in many ways:
Typically ROI can be used to make financial decisions at personal level. The advertisers know what step to make either towards making decision I. e. to change form of advertisement or to halt investment in the adverts.
The reinvestment of cash returns has no effect to discount rate of an investment; this reinvestment either affects the annual yield. This comes with the knowledge that compounded investment increases the capital investment. Once interest is earned it becomes capital for the company if this interest is invested this reinvested amount accumulate.
Findings
Right decision made and proficiency in business management will guarantee returns, This ROI indicates cash flow of an investment based on an annualized evaluation.
In return on investment generally, the risk on an investment is direct proportional to the potentiality of the investment return and the potential of investment loss. (Richard and Stewart, 2002)
Investment on advertising carries some significant risk of loss of some of the invested capital. Capital gains and losses in most cases on a stock share the value of stock is dependent on several factors. an advertisement on stock share is considered as an expenses that will be evaluated ones the stock shares are sold and the company receives it’s capital from the stock purchaser. this is the capital it uses on its daily operations. These stock shares find their ways from the original investors to other investors.
Implications
There are some factors to be considered when finding appropriate time to invest money:
- Future inflation rates.
- Risk of investment; this can be valued by regarding the likelihood of the announcement to pay Dividends on top on the advertisement costs.
The will of the investor to handle liquid money at the moment or allocate it in adverts.
Effect of advertisement on business
Nowadays, lots of firms and corporations, big and small, are using advertising business gifts as a part of their advertisement strategy. The reason for this is these business gifts are highly effectual in astonishing the latent purchasers and attracting them towards the corporations. There are various different types of products available in the market that is being used for this purpose.
Selection of any products can be used as a commercial gift and buy it in bulk. Get these gifts personalized by getting the brand name printed on it. The printed brand name would work as an announcement through which people can be repeated of the product. Once the product is ready, it may be gifted to your clients and consumers on individual events and occasions. Present your customers with these special publicity commerce gifts before or after a gathering, seminar, meeting or any such event.
These advertising business gifts help the company to establish a relation with their clients and are very effective in informing them about the products and services. They are cost effective means of promoting and advertising one’s organization. It amazes the recipient and leave a good impact that may get you mouth publicity as well. Thus this method of advertising your brand and its product is very effective and fruitful. Using the publicity business gift would be very beneficial as this unique process of advertising your company would inform people about your products and would attract them towards the same. This would further help increase your sales and would take the organization to a new height.
AS for the real examples of applying such strategies, it is necessary to mention, that the strategy of presenting souvenirs with corporative brand name on it is practiced by lots of companies, mainly those, who directly deal with their clients (banks, insurance companies etc.)
One of the companies that do not see their customers directly, and who implemented such policy is Adidas sports wear company. This manufacturer started arranging actions giving presents to the customers in 1958, when Adolf Dassler started manufacturing of blazers with Adidas brend.
Conclusion
There are many options to weigh when taking an investment decision the initial stage being to consider variety means of increased the output before one finally reaches out to a conclusive decision of advertisement. The timing of the best period to advertise is taken into consideration too taking to account the discount rate expected and the future expectations of the cash flow from the investment.
A realization of investment with less return than the annual inflation rate should be an indication of a loss of value regardless of whether the returns are greater than 0%. advertisement is a taxable investment and the investors in such cases seek high rate of return. on adjusting ROI for inflation then one must consider an increase or a decrease of the purchasing power and when this is done it gives a definite status
References
A. Groppelli and Ehsan Nikbakht. (2000), Barron’s Finance, 4th Edition. New York: Barron’s Educational Series, Inc.
Bruce J. Feibel. (2003), Investment Performance Measurement. New York: Wiley.
Edward L. Nash, (2000), Direct Marketing: Strategy, Planning, New York: McGraw-Hill Professional.
Fred E. Hahn: (2003), Do-It-Yourself Advertising and Promotion, New York: John Wiley and sons publishers.
Richard A. Brealey and Stewart C. (2002), Myers and Franklin Allen. Principals of Corporate Finance, 8th Edition. McGraw-Hill/Irwin.