03 Feb THE ROI OF YOUR BUSINESS
WHAT IS YOUR BUSINESS WORTH
If you’re serious about business, then you must know your ROI (Return on Investment). A Business’ ultimate function is to turn invested capital into positive returns for yourself and others. Do you know if your business is doing that? Here’s a simple way to calculate your business’ ROI.
WHY IS ROI IMPORTANT
- It answers fundamental questions regarding the allocation of resources.
- It will gain the attention of investors and other people who may want to fund your business.
- It can serve as a scorecard to measure your business’ performance.
Calculate your Net Profit for the year.
(Total Revenue – Total Expenses)
An Example – I made $30,000 (after taxes) after spending $20,000 this year. So my Net Profit is $10,000.
Add your Long-term Debt + Current Equity. These numbers can be found on your Balance Sheet.
Basically, together they represent what you have invested in the business (total Investment). Your money in the business plus money that you have borrowed.
For our example we noted I put spent $20,000 for the year. Now, assuming I have taken no Loans, and have not put any other money into the business. My total investment for the year is $20,000.
Divide Your Net Profit by the Total Investment.
In our example it is $10,000 divided by $20,000 which equals
.5 or 50% (.5 x 100)
And that is a simple way to calculate your ROI.
IMPORTANT TO KNOW
There are many ways to calculate the ROI of your business but this is the quickest to use as a tool to make sure your business is a sound investment for others to participate in.
Knowing your ROI is a great way to obtain funding. It gives potential investors and idea of what to expect and shows that you know your stuff.
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