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.
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.
