Business analyists looking at the financial health of a business will look at three areas – profit, cash flow and return on investment. To the average sole trader or small business owner that last one, return on investment, is a hazy concept at best. Profit is another story – most of us understand the focus on profit. After all profit is what gives us an income. Some get the importance of cash flow – being able to meet pay our bills as they fall due is clearly important. Only a few see the importance of return on investment.
Return on Investment or ROI is simply defined as the profit gained from an investment divided by the cost of that investment. ROI is very widely used by investors looking to see whether a business is worth investing in. Given that most of us are not trying to get others to invest in our business, is it worth bothering with at all?
My answer to that question is an emphatic – yes! The reason is that we are the investors in our business. We are the ones putting in our time and money. The time we invest most is right at the start of the business. In this time of start up most business owners have no thought about the return. We are full of hope and possibilty for the business. No amount of effort is too much. Most of us aren’t that money orientated anyway, we love our independence, our service and our quality of life more. The trouble is that businesses require periodic and consistent investment. Giving to the business without thinking about what you get back might be okay once, but how many times are you going to want to put in extra time, energy or money in without a real reward?
The sadest thing for me to see is people’s passion and energy for their project dwindle. If we want to keep on giving we need it to give us something back and a business can be a voratious monster if you let it. Conversely if the business gives us a return, then putting more into it becomes natural, exciting and energising.
At the simplest level ROI starts to answer the question ‘Is it worth it?’ Making sure that you have a healthy ROI is really about making sure that the answer to that question keeps being a ‘yes’.