Return On Investment - what is it and should I be thinking about it?
Return On Investment (ROI) is something that is mentioned lots, but what does it mean and is it always monetary?
In finance terms the return on investment is an assessable number .. if you spend £500 on a consultant who reviews your cost base and recommends new suppliers which then saves you £2,000 in a year the return on investment is 4:1 .. you have saved 4 times what the cost was … FANTASTIC!
But for many small businesses there are other ways to look at this, you may decide to outsource part of your business .. let’s say your admin.
You have found a freelance assistant who charges £25 an hour and they work for you 2 hours a week – this is costing you £50 a week. You can look at this purely on the numbers and say this is costing me £50 a week, why would I do it?
But you need to look at it and say, that admin was taking me 4 hours a week because it is not something I am any good at and I get too easily distracted .. oooo .. cute cat pictures on the internet ..
So those 4 hours you have gained back have cost you £50 .. which to you means the cost is £12.50 an hour .. what can you do with that time?
It might mean you can take on an extra client and that brings in an additional £100 a week which immediately gives you the financial return of 2:1 (£100 in for £50 out).
It might mean that you don’t need to have a childminder for 2 nights after school and you can spend the time with your kids .. the childminder saved cost has a value (say £25 a week .. this means the true cost to you is only £25), but the time with the kids may be priceless to you (hmmm .. sounds like a certain credit card advert now!) so it is then worthwhile.
It might mean you get to have a proper lunch break which means you are less stressed and more productive in the afternoon .. the return here cannot be given a monetary value but your health and wellbeing are vastly improved.
Returns on investment are not always a tangible, assessable number .. you need to look at the bigger picture.
Not often you get an accountant saying it’s not all about the numbers now is it eh?!
If you would like to know more or would like some help looking at this within your business then please get in touch.