Every investment in your business will have one of two outcomes. Either it will help you make more money, or it won’t?
To appreciate how much any investment in your business should be worth, convert the cost of that investment into the amount of Net Sales that investment must generate to break even on the investment cost. For example, you have a Net Income percent of sales goal of 12% and are considering an item that will cost $120,000. The Net Sales equivalent value for the new item is $1,000,000 calculated by dividing 120,000 by 0.12. If your confidence is low that this new asset or expense can generate more than $1,000,000 in Net Sales, then it’s a risky investment that should be reconsidered.
Overview
Small business owners unduly add to the stress of owning their business when they waste hard-earned cash on investments that generate little to no return. The worst thing you can do for your business is to trade a dollar for four quarters or less. You avoid doing this by using the New Investment Validation Calculation to make smarter decisions in your business.
The calculation is performed by taking the planned spend and divide that amount by your net profit percent. The calculation will tell you what the required Net Sales must be at your current percent of net income to generate a return on your investment.
Using the sales equivalent method for determining the investment risk helps you appreciate how much you have to sell to convert the cost of investment into sales required to earn the investment back. Say an investment cost $100,000 and you want a 25% return on that investment. I.e., you have a goal of earning 25% in Net Income in your business. The sales value of that investment is $400,000 (100,000 / .25 = 400,000). This means you will need to generate $400,000 in sales to return your $100,000 investment. The core question is, how long will it take to generate the $400,000 in sales?
Making money as a small business owner is difficult, particularly when fighting a never-ending need to make difficult decisions on how to proceed when time and money are tight. Decisions that will either help you make money or lose it.
B-CPR Step 3 of the BusinessCPR™ Management System is about confirming the quality of your profits. Every investment you make in the business either generates more than it costs, or it doesn’t. Earning a return on every investment is the goal. The hard reality is that this is hard to do because most planned investments cost more than planned and almost always return less than expected. This is why it is advisable to calculate your projected ROI before undertaking a major investment. Then, calculate your actual ROI to see how well your reality matches what you expected. This is the best way to ensure your money is working harder for you than you do for it.
