How to Calculate
ROI (Return on Investment)
Copyright © Stone Evans, The Home Biz Guy
http://www.PlugInProfitSite.com
Posted: Tuesday 01:25:39 EDT
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 business owner often misunderstands
the actual amount of
investment into a business. 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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