How to Calculate ROI (Return on Investment)

How to Calculate ROI (Return on Investment)
Copyright © Stone Evans, The Home Biz Guy
http://www.testedtough.com/pips.html

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.

About The Author:
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