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ROI (Return on Investment) is probably the most important calculation one needs
to make to ensure the long-term viability of their business. It is not enough
to build in a profit margin on the product or service being offered. One must
track with proficiency the amount of dollars being invested into attracting sales
and how much ROI those dollars put back into the business. If the investment meets
too little return, a product line is doomed to fail in the long-term.
THE BASIC ROI PERCENTAGE CALCULATION
Many experts seem to agree, “calculating an accurate return on investment
(ROI) is not an easy thing to do.”
I do not intend to give you a thorough analysis of the ROI calculation process.
Calculating an accurate ROI is hard to do, but explaining the full scope of
ROI calculations in less than 1000 words is far more difficult.
As such, this article is only intended to introduce you to the basic concepts
behind ROI calculations. Here is a very basic equation for calculating the ROI:
ROI = [(Payback - Investment)/Investment)]*100
Your payback is actually the total amount of money earned from your investment
in your company. Investment relates to the amount of resources put into generating
the given payback.
You should run ROI calculations on both monthly and yearly timelines.
IMPROPER CALCULATIONS BY MANY SMALL BUSINESS OWNERS
The actual amount of investment into a business is often misunderstood by the
business owner. As a result, true ROI calculations for most small businesses
are skewed.
Most small business owners make their mistake in this most necessary calculation,
because they do not properly value their own time. Please note that when I previously
defined “investment”, I stated that it relates to the “amount
of resources put into generating the payback.”
Indeed, “resources” includes cash money. But, it also includes “human
resources” or “time”.
If most small business owners would value their hours at the minimum wage,
and calculate their time into the investment equation, they would soon realize
that their small business is running in the red!
Some small business owners will finally run ROI calculations including the
human resources, and suddenly realize that they could make more money working
a job. If the small business owner has been running their business for a really
long time, struggling to make ends meet, they might see this calculation and
close their doors once and for all.
PLEASE DON’T LET ME DISCOURAGE YOU
I do not share this revelation with you so that you will close your business
down. Quite to the contrary. I share this with you so that you can see the big
picture and start running your business in a way that will actually generate
a real profit for you and your business.
If you are within the first two years or five years of the start of your business,
then running in the red should not be thought of as a bad thing. However, if
you are ten years into your business and earning less than minimum wage from
your business, there is a serious problem afoot that needs to be addressed immediately.
STARTING OUT
When you are just beginning your own business, you have plenty of time on your
hands. This is the reason why most small business owners do not properly count
their time in the ROI equation. They just look at cash expenditures and incoming
monies, and they are satisfied with that calculation.
It is often said that people generate the kind of results that they believe
they can achieve or the kind that they want to achieve. Seeing the goal is the
first step to achieving the goal. Expectations will always bring results equal
to the expectation.
Having been down the business startup path before myself, I too understand
the desire to calculate ROI without consideration to the time invested in the
enterprise.
However, I also understand the importance of placing a value on my time and
working that into my final numbers.
In the beginning, I ran two types of ROI calculations: all resources exempting
my time, AND all resources including my time.
Of course, I actually set a higher expectation for my own income level. First,
I had decided on ten dollars an hour for my time. Later, I adjusted that amount
upward.
Starting out, even though I ran two versions of my ROI calculations, I relied
first on my resource excluding my own time. Once I had achieved this goal, then
I refocused my attention to reaching the ROI which took into account my own
time.
Now, that time has passed, I can go back and look at my yearly ROI and see
that I have earned enough cash to pay for those early days of famine.
THE SECRET OF TURNING ROI CALCULATIONS INTO SUCCESS
Every step in your business startup is a calculated guess as to what you believe
you can achieve.
Measuring your results is essential to making your business profitable. ROI
measurements are imperative to measuring and understanding the results you are
achieving with your new or existing business.
Take into account all factors relating to the profitability of your business
and don’t smudge on the facts to make it seem more profitable than it really
is. It is important to approach your business and your business results with
absolute honesty. Be honest with yourself and face the facts of your task.
An honest examination of your business at regular intervals will help you get
on and stay on track to keep the doors of your business open. You will thank
yourself later.
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