How You Use ROI Every Day

For those who don’t know, ROI stands for “return on investment”. Colloquially, you might think of it as “bang for your buck”. Though it’s frequently used to describe investment decisions, ROI is something you use in your daily life. You go to the gym because the payoff of improved health has greater value than the time you put into it. You’re getting a good return on that time invested.

You might even use ROI to compare two options. Let’s say your goal is to lose fat, and there are two classes open when you go to the gym. You could go to an hour-long spin class, or an hour-long yoga class. Doing your research, you find that spin class burns 50% more calories, so you choose to go to that one, as it offers a better ROI.

Looking at it from a financial perspective, there’s a very simple formula to calculate ROI.

Return on Investment = (Gain from Investment – Cost of Investment) / Cost of Investment

Now, when it comes to ROI in small business, people tend to think of it primarily in terms of sales and marketing. Before you run an ad or hire a marketing firm, you should be looking at whether the income you’re likely to gain outweighs the amount you’re about to spend. (For a more in-depth look at mistakes owners make in their marketing budget, see our prior article, Living a Lie: The mistakes that make entrepreneurs go broke.) If you are paying a marketing firm $10,000 a year and your sales only increase by $3,000, you’re not making a good return on your investment. Likewise, if you hire a salesperson at base $45K + commission, and he only makes $15,000 in sales, he’s probably not in the right position at your company. These are the sorts of obvious examples people think of when it comes to ROI in their business.

However, any business decision really comes down to a matter of ROI, and that is true for hiring an accountant, as well. We’re constantly fighting the stereotype of accounting as a necessary evil, and one way to do that is to look at all the benefits that come with good bookkeeping and CFO.

First, of course, are the tax savings. Accurate books not only help you avoid an audit and costly penalties, but also aid you in tracking and recording every deduction for which you’re eligible.

Second is saving on expenses. A good CFO service should be locating areas of overspending and helping you restructure to lower or even eliminate certain costs. (Actually, we tend to recommend you eliminate those expenses which don’t produce a good ROI. See? It really does all come back to that.)

Third, we like investigate means of increasing revenue. This could be by introducing a new product or service line, acquiring another business, re-examining current pricing strategies, or even by locating and collecting on aged receivables.

To look at how The Bookkeeper does this from an ROI perspective, we save or earn our average client enough in our first year with them to pay our fees for 23 months. That’s an almost 100% return on investment.

Finally, there are the benefits which are harder to quantify, primarily opportunity costs. What do you save in energy and stress by hiring someone to take over certain tasks for you?

This week, I challenge you to take a close look at your business, find what’s paying off, find what’s not, and do something about it.

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