22 Aug Is Your Business Converting Investment Into Profit? Your ROI Is The Perfect Metric to Determine That
Why do some businesses generate profits while others are still making peanuts? Are there specific practices that you should follow for your business to survive and thrive?
The reason most people start up a business is to make money, right? You’ll never know if your business is making a wise investment unless there’s some type of metric to measure its efficiency. Now, let’s look at the bigger picture.
Any strategic plan or adjustment you make needs to take into consideration the performance of your business. This is where Return on Investment (ROI) comes into play and is important in determining whether something worked well or not. In determining your ROI, you have to take the total return on the investment and subtract the cost of the investment. You’ll get the percentage you gained on an investment when you divide the net gain of the investment by the cost of it.
ROI= Gain on Investment-Cost of Investment/Cost of Investment
The Basics of Return on Investment
Small businesses don’t have unlimited resources at their disposal, and even most large businesses don’t like wasting money. If you’re a small business owner, you can’t immediately decide for an expansion unless you assess your projected ROI. Growing your business can be a risky decision. Why? Success doesn’t happen overnight & you have to wait a while for your business to gain momentum. When you’re projecting ROI, you have to check if you have an acceptable estimated return and enough capital to sustain it?
Here’s How You Evaluate ROI Performance:
You’ll know your business efforts are taking shape when it’s returning satisfactory net profits. Why are you monitoring ROI anyway? Simple. ROI enables you to compare the result against goals and projections. You’ll also be able to track profitability trends & ROI is a standard metric that gives you the ability to compare results with your competitors.
How do you know your business is doing well?
If your results meet or exceed ROI objectives, it’s a good signal that you’re on the right track. ROI helps you determine the performance of your business when compared to industry norms. Of course, you can’t expect positive results all the time. There will be instances when your ROI needs improvement.
Make Room For Improvement
If your plan isn’t working well and you don’t have a way to fix it, nip it in the bud before it snowballs into a bigger problem. This is how you approach your low-performing businesses. The best thing about ROI is that it directs you to the next step you have to take. If you have a satisfactory ROI, it’s a sign that you’re ready for expansion. If you have a low ROI percentage, you need to rethink your strategies and come up with a better strategy that is going to increase the performance.
Reduce Your Expenses
One thing that comes to mind when improving your return is to raise your prices or increase your sales. Although this is an extremely effective and growth-oriented approach, you can also improve your ROI by reducing your expenses. You know which aspect of your business has potential reduction opportunities by dividing your expenses into production and overhead costs. Labor and materials are examples of production costs while rent, insurance, and phones are examples of overhead expenses. Once you know these, you (or someone on your team) can start digging into the individual expenses and see if there is better pricing or deals with your provider or even elsewhere.
Generate More Sales
Improving ROI is most commonly completed by increasing your sales or profit margins. You can either increase sales without raising your prices, or you increase your prices and still generate a net gain in your profits. These are both win/win solutions if you can pull them off effectively. Generating sales that don’t yield much profit for your business or having 20% of your customers leave when you raise the prices aren’t the ideal methods for success.
Manage Your Expectations
You might think that a wise investment means reaping a dollar benefit. Well, not necessarily. There are many other non-immediate benefits that you can still consider as a good ROI. Let’s say you provided a salary increase to your employees. We all know that you’re not generating profit, but rather the exact opposite. However, this technique may allow you to increase productivity or hire more talented workers to offer a higher level of service . These benefits will have a ripple effect on your business and are worthwhile options to consider.
There is no perfect strategy for increasing your ROI. When you experiment frequently, you’ll know the path to take in accelerating business growth. Keep the experimentation process simple. Failed experiments should be a learning opportunity so that next time you can improve your strategy in a more effective manner. Don’t dwell on it too much. Learn what you can and go back to the drawing board.
Restructure Business Departments
First, you need to decide how much you want to spend for your business. If you’re looking for an immediate boost in your cashflow, you can remove products/services that don’t yield a good profit so you can focus on the ones that do. Devote your money and resources to the services or products that generate the most amount of profit.
If you’re still not sure what appropriate steps to take to increase your Return on Investment, get in touch with our team and we’ll help your business achieve the sustainable growth it needs!