Are you an entrepreneur and need to know how to calculate your business's ROI ? We have excellent tips for you!
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How to calculate the ROI of my new business?
You're in the right place to learn how to calculate your business's ROI ! ROI is calculated using a simple mathematical equation. Here it is:
Very simple, right?
But what is ROI? ROI stands for " Return on Investment " and it's used to determine the profitability of an investment. How much money has an investment generated? How many expenses does it cover? How profitable was it? The equation above allows us to know all of this: The first part gives us a simple number, the second, a percentage.
Now, how do I calculate the ROI of my business? What should I know? In principle, you must know EVERYTHING about the total cost of the investment, so that you can know with much greater accuracy what your total profit will be. Second, you must have the knowledge about the total gain. Do you want an example to understand better? We have it for you:
Suppose that in your business the investment is about $7000, it is the total cost of it, it includes every possible expense that you make. Now, in the end, you get $35000. How to calculate ROI then? We use the above equation:
ROI = (Total profit – total cost of investment)/investment
ROI = ($35000 – $7000)/$7000
ROI = 4. This means that your business recovers 100% of your investment, AND you generate 4 times the cost of your investment in profits! If we multiply this number by 100, we get the winning percentage, that is, you win 400%.
How can I know when a business is NOT profitable?
The fact that a business is profitable will depend, in part, on you. Not all businesses or investments will produce you 4 times more than the cost of the investment, some may generate more, or less. It might even NOT make a profit. That depends on how much it generates in total and how much it costs you to invest.
For example: Suppose you own a house with 8 rooms which you are renting, each, for $15 per month. That is, monthly you will get $120. You must pay the house taxes, among which can be all services, insurance, etc. The cost of that total investment is $137 per month. Let's do math:
ROI = ($120 – $137)/$137
ROI ≈ -0,12 x 100% = -12%. You are losing the equivalent of 12% of the investment! If for some reason this can happen to you, you should check if there is something wrong, or if the business is simply not profitable.
In this video you will see more details about investment risk and ROI calculation, and some examples:
Are you an entrepreneur? Are you starting a new business to earn more money but worried about the risk to your capital? Click on the link below to learn all the details about how to assess risk and better understand how to protect your capital.