Why Traditional Metrics like NPV, IRR and RONA Kill Innovation (+ Metrics To Focus On Instead)
“That which can be measured can be managed.”
As such, 20th Century management science gave us a number of metrics to monitor the performance of a business venture, including return on investment (ROI), net present value (NPV) and internal rate of return (IRR).
First, a quick refresher!
Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project.
Internal Rate of Return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment.
Return on Investment (ROI) measures the gain or loss generated on an investment relative to the amount of money invested. ROI is usually expressed as a percentage and is typically used for personal financial decisions, to compare a company's profitability or to compare the efficiency of different investments.
Return on net assets (RONA) is a metric which measures a company's financial performance with regard to fixed assets combined with working capital.
Now if your effectiveness as a manager is being assessed against the aforementioned metrics, then your best path of action to make the numbers look good is to:
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The WorkFlow podcast is hosted by Steve Glaveski with a mission to help you unlock your potential to do more great work in far less time, whether you're working as part of a team or flying solo, and to set you up for a richer life.
To help you avoid stepping into these all too common pitfalls, we’ve reflected on our five years as an organization working on corporate innovation programs across the globe, and have prepared 100 DOs and DON’Ts.
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