The terms described above are important to understand when building and managing budgets. We define budget here as the plan of operations based on estimates. The budget is built then from estimating fixed and variable costs plus any project activities.
I have a personal budget. In fact, it resides on my laptop in Excel. It's a running 12-month budget into which I input expenses, which then are deducted from my monthly income, or salary. It includes fixed costs — e.g. car and cell phone payments — and variable costs, such as utilities and credit card costs. Each month, I estimate my expenses, and at the end of each month I review actual spending. If I estimated correctly, I'll have enough to pay my bills and maybe even have cash left over. I am managing my cash flow and ensuring there is enough to cover my expenses.
ROI is a financial calculation that evaluates the consequences of a project in terms of magnitude of the outflow of cash versus the time it takes to break even or achieve expected returns. The calculation is the initial investment divided by the initial investment plus the expected return. The break-even point is some time period before a return is realized.
Determining ROI for capital improvements, such as energy-saving devices, high-efficiency motor replacement, and any other tangible item is fairly straightforward.
To calculate ROI, simply take the gain of an investment, subtract the cost of the investment, and divide the total by the cost of the investment.
How do we calculate ROI on other common investments? How do we determine ROI from implementing work-management controls or reductions in response times and improved customer service? Are these not investments?
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