A business can generate a great return on investment especially for service business where the start-up costs tend to be quite low. Sure, with time more investment is required, software, equipment, marketing, coaching, etc. but if a business manages to generate a profit the return on investment (ROI) can be impressive.
Let’s put some figures on this as an example:
Investment: Equipment: $4,000
Other initial costs: $5,000
If the business then generates, say, $4,000 per month and after all costs (including the owner’s salary) the profit is $750 per month, that will be $9,000 per year so the ROI is 47%, not bad right?
However, this is not strictly how you calculate ROI in accounting. If your accountant were to make this calculation they would consider only assets or liabilities as the ‘Investment’ so coaching and other initial costs would not be categorised as assets.
Official accounting has to follow rules, but the idea here is for you to be able to make this calculation and evaluate the return from your business compared to if you were to take the same money and invest in something else.
Give it a go: Add up all the investment you have made in your business compared to how much profit is generates per month in average. Calculate the total for the year and divide by the total investment and multiply by 100 that will give you a percentage.
What happens though with many service businesses is that money comes in and goes out in the same speed so there will be no profit to be the ‘return’ on your ROI calculation.
This is because in the same way as we need to have a marketing strategy and an implementation plan we also need a strategy and plan for your business finances.
There are certain insights that you will only have if you have this overview of your finances.
For example, maybe you work less during the summer because of the school holidays and knowing that the revenue will decrease in this period, rather than carrying on as normal maybe you can cut some of the costs to preserve your profit.
Or maybe if your costs are mainly fixed and you can’t really cut them suddenly, so what you can do is in other months when you have a higher than usual revenue instead of spending this extra money you can keep if to make up for the lower profits in other periods. This way you will preserve the yearly profit figure.
Money is fluid so it come in and goes out, that is natural, but for you to make a profit or keep more of the money you make you need to have a plan of how to spend your money splitting it in different categories with a certain degree of flexibility to move the money around to adapt to any circumstances that you didn’t think of when creating your plan.
It is also interesting to consider how you can leverage yourself and your time by creating systems that enable parts (or most) of your business to run without you being there doing everything.
This is because the less your business depends on you for everything the easier it is to sell it in the future. Is selling your business something you have ever considered? Read more…