Calculating Return on Investment (ROI)

How to calculate Return on your investment & plan your business
expenses:

Some people call it ROI (Return on Investment) & some people call it ROIC (Return on Invested Capital). Both are actually same but it is very important that we periodically calculate it to check the health of our business.
The formula for calculating ROI is :
ROI = [(Benefit in Rupees - Investment)/Investment)]*100


To summaries it in a single statement "It is a measure of the Rupees returned for Rupees invested".
So ROI calculation is not important just for the health of your overall business but it is equally important when you plan for any investment whether it will return positive ROI or not. So whenever you want to make any decision regarding a moderate to major investment you must calculate ROI for that investment & see whether it makes any sense to go for that investment or not. I suggest each & every capital expenditure should go through this & this will help you run your business profitably & this will also help you to avoid impulsive investment decisions.
While calculating the total investment make sure you also include the run cost , maintenance cost & as well as the cost of funds.
You can consider the following while calculating the benefits:
Typical benefits that are considered in an ROI assessment include:
Increased revenue, e.g. increased sales, or sales margins
Retention of sales that would otherwise have been lost
Reduction in operating expense, e.g. daily time savings, eliminated rework.


Since what you can include in the benefits or cost is always a subject of argument & can be easily manipulated. Since everyone agrees to the importance of this tool, i suggest to form a core team who can agree on the parameters used for the calculation.

How to Calculate Start Up Costs for a New Business?

The very first issue that comes up with a startup is to find out the intial investmment/funding required. Though the best way is to start this with a detailed business plan in hand. But here is the list of things I have done to come to the estimated cost of initial setup & the additional capital to keep the business running till you get the operational break even:

1. Writedown each & everything you would need & when. Try to capture the cost of each of the item. Keep 10-20% extra to keep the buffer for any missed out item or higher cost. To determine the costs of the equipment your organization needs, look for online distributors or commercial wholesalers available locally.

2. Determine business start up costs for your area. This can include a business registration charges, insurance for your business, getting PAN numbers, TAN Numbers etc.

3. Determine the office space cost and for other assets required. Make sure you include all the brokerage charges, advance rentals etc.

4. Determine the cost of hiring employees.

5. Think about advertising and marketing expenses that can get your business out there. Newspaper ads, flyers, phone book advertisements, or online advertisements are examples. Business Cards and referral cards can be helpful as well.

6. Determine all the ongoing expenses required to meet monthly expenses of running the operations.

7. Ongoing costs can include Salaries, utilities charges like Electricity & telephone bills, rent, supplies required for your operations, marketing & advertising etc. Ongoing expenses should be considered for good enough period atleast till the period you get operational breakeven & beyond.

8. Must keep atleast +20% buffer while calculating your expenses. More the buffer better prepared you are.