Return on time invested is oftentimes an overlooked concept but that it can be extremely useful, in our professional and personal lives. Time is a resource just like capital, and although it is nearly impossible to gauge the return and value of our time, it is possible to estimate it.
In finance, returns are calculated based on several aspects. Whether it is the return on investment, return on invested capital, return on equity, and so on. However there are other assets, and resources that are not so easily quantifiable, in this case - time.
What is the return on time invested?
Return on time invested is a measure of how much we can actually produce with the time that we have at hand. This is certainly not the same as calculating returns on nominal values. However, the concept is of the utmost importance, especially among startups. A startup faces many challenges from the get-go. They might even be well-capitalized and have fairly easy access to capital, but time is certainly one of the most important resources they have. Return on time invested tries to calculate the productivity ability of human capital.
Return on time invested in startups
From the founders to the first employees in a startup being able to accurately analyze how much time and effort is being put into a particular task, and the outcomes they achieve is perhaps the most defining aspect of a young company’s success. Being able to invest resources and time into parts of the business that actually generate future cash flows is crucial. But how do we measure return on time invested?
Well inhere lies perhaps one of the most difficult questions to answer, and there is no definite answer. We can measure return on time invested based on what someone is able to accomplish on a given timeline. Yet, to accurately estimate the return on time invested, we need a fairly large sample size. That allows us to draw any definite conclusions. Certain tasks might be easily accomplished, and some might not. It is also nearly impossible to estimate the ramifications and future returns based on work done today.
Return on time invested for investors
Investors often try to calculate the returns on a given investment simply based on their monetary value. Yet, no investor ever calculates their returns based on the time and effort they have to dedicate to analyzing a particular business.
Seasoned investors are often too focused on the company’s ability to generate profits. However, there are other metrics that seem to also be crucial to determine if an investment should be made. Although it varies depending on the particular industry, and the company behind it, there are ways of assessing return on time. For example, calculating profits based on the number of employees a company has can be a very interesting way of trying to estimate the return on time invested. A few factors need to be accounted for, like the particular modus operandi of the business and the industry. It should also be analyzed whether the company relies on outsourcing or not. Although there are not many conclusions we can take from this, there are some hints.
A company that is able to generate a certain amount of profit, without outsourcing any of its work is a great sign. High generated profit per employee is also another positive indicator. It means that it is much more likely to be able to scale effectively. When compared with some other company in the same industry that is generating fewer earnings for each employee it has.
What does a high return on time indicate?
This is certainly a differentiating factor between companies and startups. The reason this works extremely well for venture capital, and investments in startups is the fact that high return on time invested shows promising signs. It is indicative of:
- A company’s ability to scale is usually larger if its return on time invested is higher.
- Management and the rest of the employees are organized and are highly productive.
- The company’s strategy is well implemented.
- Human capital is incredibly talented and adds great value to the enterprise.
- The company's hiring process and its human resources department are superior.
- Management is able to effectively delegate tasks.
- The company has a stellar execution.
- Great ability to train and retain amazing employees.
All of these signs, even if they might be skewed due to the very low sample size, are very positive indicators. Not only for the company but also for those looking to invest in it. Despite that, a company might seem to have a high return on time invested but may not be characterized by some of the points mentioned above. In fact, our perception of what is driving productivity might be wrong. Perhaps the perceived quality of the employees’ work might be driven by great management and terrific organizational skills.
Sometimes the company’s high return on time invested may also reflect the competitive landscape of a particular industry. Giving the wrong impression about their actual returns on time. The company might also have several competitive advantages or moats, which might be the reason behind their ability to succeed in a shorter time period. This may also give the wrong impression.
Using it in our personal lives
The concept may also be applied to us as individuals. In fact, this seems by far to be a much more accurate way of calculating return on time invested. It becomes extremely more complex to try and figure out exactly what an organization’s return on time invested is when compared with an individual. However, when we analyze ourselves, all sorts of biases may surge, rendering our conclusions useless. For those individuals who can be extremely unbiased in their own assessment of their productivity, and work this can be one of the most important metrics to auto-evaluate ourselves.
Challenges in calculating return on time invested
Due to the complexity of such an abstract concept as return on time invested it is nearly impossible to quantify it. Even if we tried to come up with a formula it would still be an inaccurate way of calculating. The problem arises when trying to come up with a numerator for the formula:
Return on time invested = X / time invested
Certainly, different enterprises and individuals would estimate their return on time, based on different aspects. One could argue that earnings and profits should be used as a numerator. However, it would not be an accurate estimate of the returns. Since future revenues and earnings would also be impacted by the time invested now, it becomes impossible to calculate.
As we have seen, return on time invested is an often overlooked metric. Due to the fact that it is extremely difficult to calculate and assess. However, it is of the utmost importance that we are aware of it. So that we can try to implement strategies that allow us to improve our returns on time. For businesses, it is fairly easy to estimate the return on time, when calculated based on a very specific period of time, and tasks involved. It can give a detailed view of the company’s roadmap into the future.
A company that knows what is doing, will often direct its efforts towards tasks that end up creating a monetary return for their time. Such as increasing revenues, profits or even cutting expenses. For individuals, it becomes much more difficult because we rely on ourselves to make our own assessments. This leaves enough room for error and biases that may conflict with reality.
Image source: wall
Leave a Reply