Return on investment: what it means & how to calculate it
By Guest Writer | 26 November 2024 | Business, Expert Advice, Feature
Global business & beauty education expert, Kim Ford, explains what a return on investment means for your nail business, and how to calculate it.
You may ask: what is a return on investment, or ROI? As an example, imagine you purchased a pedicure chair costing £1,000. How many clients have you gained by having this chair? Have you found that existing clients have upgraded their treatments to include the chair? How much did it cost to have fitted, and how much water and electricity does it use?
Working out the return on investment includes assessing the chair costs, how many clients use it, its occupation time and how long it will take you to make your money back.
How to calculate the return on a business investment
When contemplating whether to make a business investment, there are several factors to consider, to determine its return. It is important to calculate the initial investment accurately. This includes the purchase price and any additional costs, such as taxes, fees and renovations.
It is also important to carefully estimate the expected return on your investment, and there are a few steps to follow. Think about the initial investment. This will involve projecting future cash flows and considering factors such as sales revenue, operating expenses and potential risks.
Think also about the time period in which you would expect to see a return on the investment. Next, calculate your net profit, which is your total revenue minus expenses. Then divide the net profit by the initial investment and multiply by 100, to calculate the ROI percentage.
This will help you to measure the financial performance of the investment, assess its viability and consider your growth strategies, which should make it clear whether to invest or not.
What to do if you have a poor ROI
If faced with a poor return on a business investment, there are some steps you can take to deal with the situation. The first is to conduct a thorough analysis of the areas contributing to the poor return. This involves examining market conditions, competition and internal operations.
Once you know the causes, you need to make strategic adjustments to improve performance. This may involve reallocating resources, implementing new marketing strategies, and seeking expert guidance that can provide valuable insights and potential solutions. Ultimately, perseverance, adaptability and a proactive approach are key in turning around a poor return on a business investment.
What to do if you have a positive ROI
Return on investment reflects the financial health and success of your business. So, if you have an excellent ROI, this shows that your business is generating profits. It can enhance your business’ reputation and credibility, making it more attractive to customers, suppliers and employees.
Now, carefully consider your next steps. Think about the reasons behind the success of your investment. This will help you to identify the strategies that aided you in the positive outcome and copy these in future investments. Think about your goals and objectives, and consult with financial experts or advisors who can provide valuable insights and guidance on how to effectively manage and grow your business. This means you can ensure continued success.