Controlling the Rate of Return: A Guide for SAP Users

As a senior executive with years of experience in SAP Financial Consulting, I've seen firsthand how powerful, but also how tricky, managing your company's finances can be. Many clients strive to get the most from their SAP system for financial planning and profit. I know how confusing Controlling the Rate of Return can be, especially with all the calculations involved.

Many clients have told me they avoid diving too deep because of the math involved. My background in Managerial Accounting and implementing SAP from scratch gives a unique perspective. This experience helps companies achieve their strategic goals, and is especially valuable in controlling the rate of return

The Core of Controlling the Rate of Return

The basic Return on Investment (ROI) formula is your starting point for understanding and subsequently controlling the rate of return. The formula is: ROI = (Net Operating Income / Sales) * (Sales / Average Operating Assets). This is sometimes conveyed simply as Margin * Turnover.

The first part shows operational efficiency. The second part shows how assets create revenue.

You, as a manager, can increase profitability by using one of these three approaches.

This can also positively affect ROI when you’re being measured:

• Increasing Sales.
• Reducing Expenses.
• Reducing Assets.

Breaking Down ROI Improvement Strategies

Let's go back to the formula and use an example company with figures for analysis. We'll use this to decide what can be improved.

Scenario Data:

• Net Operating Income: $10,000.
• Sales: $100,000.
• Average Operating Assets: $50,000.

Plugging these numbers into our ROI formula, we get:

($10,000 / $100,000) * ($100,000 / $50,000) = 20% ROI.

This gives us a baseline to work from.

Let’s use each method to improve this.

Approach 1: Increasing Sales Volume to Control Rate of Return

Let's say we boost sales by 10%, from $100,000 to $110,000. Assume further that either because of good cost control or because most costs in the company are fixed, the net operating income increases even more rapidly, going from $10,000 to $12,000 per period. If assets hold steady at $50,000, we can calculate the impact.

The new ROI calculation is:

($12,000 / $110,000) * ($110,000 / $50,000) = 24% ROI.

The profit margin goes up from 10% to nearly 10.91%. At the same time, turnover rises to 2.2, lifting the overall ROI.

10.91% x 2.2 = 24% (as compared to 20% above).

If you need to boost sales immediately, paid advertising, particularly Google PPC campaigns, can help.  We recommend you first understand your potential ROI from using Google Ads by taking our Google Ads ROI Scorecard.  It's free!

Business Case for Using Google Ads to Rapidly Improve Sales and ROI

The most effective way to quickly improve ROI is to increase sales, as demonstrated by the managerial accounting principles above. A 10% increase in sales, from $100,000 to $110,000, resulted in a 4% absolute improvement in ROI, from 20% to 24%. This was the highest impact compared to cost-cutting (which improved ROI to 22%) or reducing assets (which improved ROI to 25%).

Google Ads, combined with a robust inbound marketing strategy, provides the fastest and most predictable method for increasing sales. Unlike organic strategies, which take time to build momentum, paid ads immediately drive targeted traffic from high-intent buyers. With optimized campaign management, a business can scale ad spend in direct proportion to profitable customer acquisition.

ROI Calculation for Google Ads Investment

Let's define the key variables:

• Current Sales (S₀) = $100,000
• Net Operating Income (NOI₀) = $10,000
• Operating Assets (A) = $50,000
  
  
• ROI Formula = (Net Operating Income / Sales) × (Sales / Operating Assets)

Scenario: Investing in Google Ads

• Google Ads Spend (AdSp) = $10,000

• Expected Return on Ad Spend (ROAS) = 3x (i.e., $30,000 in revenue generated)

• New Sales (S₁) = $130,000 ($100,000 + $30,000)

• Assumed Net Operating Income Margin Increase: Since fixed costs remain largely constant, let's assume 30% of additional revenue converts into NOI.

• New Net Operating Income (NOI₁) = $10,000 + ($30,000 × 30%) = $19,000
  
  

• New ROI Calculation:

  (19,000/130,000)×(130,000/50,000)=14.6%×2.6=37.96%(19,000 / 130,000) \times (130,000 / 50,000) = 14.6% * 2.6 = 37.96%(19,000/130,000)×(130,000/50,000)=14.6%*2.6=37.96%

Is a 3X ROAS Reasonable?

This represents a substantial increase in ROI from 20% to nearly 38%, demonstrating how an investment in Google Ads can create immediate and measurable improvements in profitability.

A 3x ROAS (Return on Ad Spend) is generally a reasonable benchmark for many industries, but it depends on factors such as industry, competition, ad optimization, and offer quality. Here's a breakdown:

Typical ROAS Benchmarks by Industry

• Ecommerce: 2.5x – 4x
• B2B SaaS: 3x – 6x
• Lead Generation (e.g., Consulting, Services): 3x – 10x
• Retail / Consumer Goods: 3x – 5x
• Local Services: 2x – 5x

A 3x ROAS means for every $1 spent, you're generating $3 in revenue.

Is 3x ROAS Realistic for You?

Since I run high-level Google Ads campaigns with a focus on optimizing performance, 3x is a conservative assumption.

In some cases, your ROAS might be higher if you're using:

• High-intent keywords (e.g., "hire SAP consultant" vs. "what is SAP?")
• Optimized landing pages for conversions
• Retargeting strategies to capture lost leads
• Effective inbound marketing follow-up

What If ROAS is Lower or Higher?

• If ROAS is 2x: The ROI improvement will be lower, but Google Ads can still be profitable if your net profit margins are strong.
• If ROAS is 4x or more: Your ROI gains will be even higher, meaning scaling ad spend would be an easy decision.

Google Ads ROI Calculator

Want a Google Ads ROI Calculator to run different scenarios using your own numbers?  You can download my free Google Ads Calculator here.

Approach 2: Expense Reduction's Impact on Rate of Return

Suppose we cut costs by $1,000, effectively raising net operating income to $11,000. If sales and operating assets stay fixed, there's a noticeable impact.

Here, the ROI changes to:

($11,000 / $100,000) * ($100,000 / $50,000) = 22% ROI.

This approach lifts the profit margin by one percentage point, improving the ROI.

11% x 2 = 22% (as compared to 20% above)

Approach 3: Reducing Operating Assets

Let's consider asset reduction. Reducing assets to $40,000 changes the equation, if other data remain untouched.

This raises the ROI:

($10,000 / $100,000) * ($100,000 / $40,000) = 25%.

The decrease in operating assets increases turnover, resulting in a higher ROI.

10% x 2.5 = 25% (as compared to 20% above)

Each approach provides a clear understanding. They also highlight different methods for achieving profitability gains and improving your return. These methods help you better understand and gain an improved annual return, providing a good return calculated based on strategic financial adjustments.

Strategies in Detail

Improving sales figures isn't just about volume. A business’s strategy must affect the profit margin positively, not negatively, for true gains.

Focusing on Sales Strategy and Market Dynamics

You need a strategic approach. This means ensuring costs don't rise faster than sales revenue.

My MBA days emphasized understanding fixed expenses and how they impact overall profitability. Solid cost management tools are needed to keep track of these figures accurately. Using price optimization tools, such as those within SAP, can boost ROI further, making sure of a strong annual growth rate.

Cost Control Measures

Cutting costs is vital; even small efforts have an impact. Discretionary costs are usually the first place to look for potential savings.

Finding and eliminating even minor expenses can help boost ROI slightly each month. Also, consider renegotiating supplier contracts or improving production processes.

These can lower variable expenses without harming product quality or employee morale. Controlling operational expenses can positively affect the compound annual growth, and it helps over multiple periods. Be mindful that inflation reduces your purchasing power over time, so always account inflation when making your projections.

Effective Asset Management

Efficiently managing operating assets often requires substantial effort. Managers may overlook this, focusing solely on the income statement.

However, a comprehensive ROI evaluation often reveals excesses in the asset base. As inventory is reduced or payment collections are accelerated, freed-up cash flow can be reinvested. Consultants can offer valuable assistance in identifying these opportunities.

One real-life example comes to mind. A firm manufacturing cast iron pipes in my region adopted the Investment Center approach.

After evaluating their operations, they identified and reduced excess inventory of outdated stock. By the second year, operational efficiency had significantly improved due to better asset management. These actions contributed to maintaining a positive growth rate, regardless of broader market risk.

Why Controlling the Rate of Return Matters to SAP Customers

It is important how you calculate rates and payments with transfer prices. If there’s disagreement within a corporate structure, transfer pricing issues arise.

They can significantly alter the company's financial figures and profit data, potentially causing concerns for the CFO. These discrepancies will have large effects on cash flows and can affect your bottom line.

Here’s what a sample cost object hierarchy for a line of business might look like. In the example chart below, this process may span multiple legal entities and many levels within a single entity:

Proper configuration of SAP systems is crucial. This demonstrates a manager's capability to accurately track and allocate resources.

An effective setup allows for clear visibility into financial performance and aids in strategic decision-making. Accurate tracking and resource allocation also facilitate better risk management and help in making informed decisions.

FAQs about Controlling the Rate of Return

How is Margin Computed

Margin is a crucial component in understanding financial performance, representing the percentage of sales that has turned into profit. To compute margin, you divide the net operating income by sales and multiply by 100 to express it as a percentage.

For example, if a company has a net operating income of $10,000 and sales of $100,000, the margin would be calculated as ($10,000 / $100,000) * 100, resulting in a 10% margin. This figure helps businesses assess their profitability and make informed financial decisions.

How is Turnover Computed

Turnover, often referred to as revenue, is computed by multiplying the total number of units sold by the price per unit. For example, if a company sells 1,000 units of a product at $50 each, the turnover would be calculated as 1,000 units multiplied by $50, resulting in a turnover of $50,000.

This figure represents the total income generated from sales before any expenses are deducted, providing a clear picture of the company's sales performance over a specific period.

Annual Turnover vs Profit

Annual turnover and profit are two distinct financial metrics used to assess a company's performance. Annual turnover, also known as revenue or sales, refers to the total amount of money generated from the sale of goods or services over a year.

For example, if a retail store sells $500,000 worth of products in a year, that amount represents its annual turnover. Profit, on the other hand, is the financial gain remaining after all expenses, taxes, and costs have been deducted from the turnover.

Using the same example, if the store's expenses total $400,000, the profit would be $100,000. Thus, while turnover indicates the scale of business operations, profit reflects the actual financial benefit realized.

What is the ROR method?

The Rate of Return (ROR) method evaluates a project or business using percentages. The ror formula involves taking the yearly revenues derived from the initial investment, divided over its entire lifespan.

This provides a clear, percentage-based metric for assessing profitability. Understanding this metric helps businesses in their business valuation and in managing corporate finance decisions.

Conclusion

Understanding and strategically setting your approach enables managers to exert control over profitability through various targeted actions. Boosting sales, cutting costs, and effectively managing assets contribute to achieving strong financial performance within an SAP environment.

Businesses may encounter challenges in setting intercompany prices or reaching consensus on financial strategies. "Controlling the Rate of Return" requires dedicated attention and proactive management. If this still seems overwhelming, my team and I are available to provide assistance and support.