Finance - Return on Investment

Set-Up a Budget
You need to set up a budget at the beginning, before you start your business. The budget will set out your projected income and expenses and it should be monitored closely on a week to week and then a month-to-month basis, against your actual performance. You may need to break up your budget so there is a start up cost section, as well as the operational cost section.

Whatever you do, the budget is your road map, so you have to compare your actual performance at all times with that budget in case you find yourself in a situation where your operational costs are higher than what you can afford. Develop this budget with help from your accountant or financial adviser.

Work Out your Break Even Point

" The break even point is the point at which your revenue will equal your cost ..."

Your break even point is critical in measuring what your business can do. The break even point is the point at which your revenue will equal your cost. It is the point where you are not making a profit, but you are not making a loss either – you are simply breaking even.

The break even point will help you to calculate what you need to sell in order to stay afloat, without making any headway and then you can plan from then on to achieve results on a higher level, so a profit can be shown.

Once you have exceeded your break even point the business will be starting to turn into profit.

Calculate the Profit you Need to Make
An essential part of your planning is working out what you want to make. Remember you are in business to make a profit so it’s no use continuing if you going to be making losses all the time.

Work out what your minimum profit needs be to meet what you would get if you had invested the money you put into the business somewhere else (such as in the bank or other investments) add on what you would have earnt by working for a boss and then add a percentage or amount to cover for the risk of being in business.

What your Business must Provide you with
Your business is an investment. That means it must provide you with a fair return for what you are putting into it. The return must take into account the risk you have to take by going into your venture.

The return you need to get back from your business should reflect 3 main things:

  1. A return for the time you out into your business
  2. A return for the money or capital (including value of all assets etc) you have invested into your business.
  3. A return for the risk of being in business

The total would be the minimum profit that you need to make in your business for the business to be doing OK. Otherwise the whole project would need to be re-assessed.

Your Minimum Target Profit can be calculated as follows:

  1. A reasonable salary for you and family – What you (and family members) would have been paid if you were working for a boss for the hours you put in

    • Decide on a basic salary that you would have obtained from a similar position if you had worked for a boss - eg. $50,000
    • Add any wages for remembers of your family in the business - eg $ 10,000

  2. Estimated amount for a return for capital invested – What you would have been able to earn if the money and assets you have put into the business was invested elsewhere.

    • Add in what you could have got in interest if you were able to place it in another outside investment - eg $ 5,000

  3. Add in an amount to cover risk and other things

    • Add on the cost of replacing any assets of the business. A formula that many use as standard is to take the value of the assets and divide by 3. e.g $9,000 divide by 3 = $3,000
    • Add in an amount to make up for loss through inflation as this should be provided for out of the business profits. Say the working capital is $30,000 then take a figure of 2% = 2% x 30,000 - eg $600
    • Add in a figure to cover the rate of growth, say 5%. That is, 5% x total investment say $50,000 = $2,500.

      YOUR PROFIT TARGET should be the total of above = $71,100