As a matter of fact it does not really matter whether you are looking for investors to finance your business or funding your business yourself one of the first things you will want to know is Return on Investment (ROI). In this article you will be walked through the formula.
The first thing you need to be aware of is that return on Investment (ROI) is normally expressed as a percentage. The ROI formula gives you the answer as a decimal. As you know you can express the decimal as a percentage by multiplying the decimal by 100, and adding the “%” sign.
It goes without saying that investors will think about “wealth” rather than money per se due to the fact a business may own things such as equipment or real estate that has value, but is not actual cash. It will be useful for you to find out that to include everything of value, return on investment measures how much wealth changes over time. The other important fact that must be pointed out is that ROI is a rate of growth.
In order you can measure your return on Investment (ROI) you need to know the following three key points:
First and foremost you need to know the net profit. In other words it is the amount the business has earned beyond what is needs to cover its costs.
Secondly, you need to know the net profit total investment in the business. It should be pointed out that this incorporates Start-Up Investment (simply speaking this is the amount of money that was required to get the business started plus additional money invested later).
The last but not least thing for you to take into consideration is the period of time for which you are calculating ROI and this is, in general, one month or one year.
ROI Formula = Net Profit/Investment = ROI
As a matter of fact there is also an easier way to keep in mind the ROI formula. It is very simple: What you made over what you paid, time one hundred.
In order it will be easier for you to understand let’s have an example.
1. Net Profit: The income statement shows this to be $775
2. Investment: You invested $1,000 in shoes and $25 in Flyers, plus $500 to rent a booth at the flea market. Total = $1,525
3. Time Period: Let’s calculate the ROI for one day.
Now, divide investment into the net profit.
Net profit ($775)/Investment ($1,525) =.508 X 100 = 51%
So, we discovered that your ROI was 51 percent for that day. As you understand ROI shows you what the rate of return was on your investment in your business.
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