To turn the dream of having your own business into a reality, you’ve had to invest time, money and a lot of work. And after all this effort, you expect to make big profits. However, entrepreneurs need to be aware of how much they’ve earned from every investment they’ve made in their business. They have to know if the business might have better performance if they learned how to properly distribute their resources. Randall Castillo Ortega, the founder of RACO Investment, explains the return on an investment (ROI) and how to take advantage of it to calculate the benefits of a loan for a small business.
The ROI is a profitability indicator that measures the profits of an investment relative to its cost. By using it, you can determine how profitable a purchase or expense is. Explains Castillo, “By measuring your business ROI, you will increase your chances of success in the long run, as you will be able to make better-informed business decisions. In this sense, your goal should be to achieve maximum performance with minimal investment.”
ROI is the most common indicator for establishing the overall profitability of a business; but it also has other applications. With it, you can measure, for example, how effective your company’s digital marketing plan is, or if your prices are competitive. It is also used to calculate financial benefits when purchasing assets, such as equipment or inventory. Return on investment will help you decide which purchasing alternatives can generate profits or cost savings, increasing your business net income.
There are several advantages of ROI. It is an easy to calculate and easy-to-understand indicator. It is a standardized and universal measure of profitability, with the same connotation anywhere and therefore cannot be misinterpreted. In addition, it is a versatile indicator that can be used to evaluate the efficiency of a single investment, or to compare the yields of different investments.
In business, a good investment is one that brings an annual average yield of between 5% and 12%. An ROI of 5% is usually bad, while one greater than 12% is considered excellent. Note that this percentage may change slightly depending on your industry.
A business loan can increase your business’ chances of growing. By calculating your return on an investment, you’ll be able to know how to better invest money and make greater profits. To get started, you need to calculate the total cost of your investment and the potential benefit you expect to receive. That way, you’ll know if the risk is worth it. The hardest part is estimating the net profit you can get from the investment. Expressed as a percentage, THE ROI is equal to the gross investment profit, divided by the total cost of the investment.
Remember that to get the net profit, you need to take the full profit and subtract what you spent on the investment. Adds Castillo, “To get accurate results when calculating the return on an investment, you should consider certain variables. First, you need to budget the cost of the investment to determine how much money you are going to invest. Time is also a key factor. If you plan to make an investment that generates profitability over several years, calculating ROI can be more complicated.”
You can project a very positive return on investment in the long run, but not always the profit will be the same. This can be decreasing or increasing, depending on external factors, such as demand for your goods or services, or internal factors, such as problems on the production line or an increase in sales thanks to the implementation of a virtual store, to name a few examples.
Once you’ve decided which areas you could invest money in and how much money we’re talking about, you need to evaluate whether a loan will help you make the investment your business requires. If it is, you should choose a lender that knows the business sector your company belongs to and helps you identify areas of your business that might benefit from a loan. Don’t forget that, in addition to having favorable terms, the loan should offer you a good return, that is, a return on investment.