A thorough understanding on the term, ROI is very significant especially in small businesses, as the parameters related to ROI determine whether business is on the success or failure path. Small businesses must continuously track and evaluate ROI to determine if the expenditure incurred so far has been profitable or not, and if the future expenditure would yield expected value. The question may arise whether the entrepreneurs of these businesses intuitively know whether or not their spending decisions are accurate based on their past experiences and spending patterns? The answer is obviously “yes”, however, the entrepreneurs perhaps may not be at their best in realizing more profitability without having a clarity on multiple channels where spending yields more value.
The profitability of any business cannot be calculated solely based on the costs and revenue. The impact of intangibles is also one of the critical success factors for ROI, as these objectively have a great impact indirectly on the business. What if a strong messaging of company’s ideology in social media becomes a key factor in attracting right talent for the resource needs? This may dramatically reduce company’s effort and money in investing into multiple advertising channels, consulting companies, and effort in reducing turnaround time for successfully meeting the hiring needs.
ROI exercise should not be done for petty things, and it should not replace entrepreneurs gut feeling based evaluation of spending at all times. It only should help them avoiding purchases that seem to be necessary, but in reality absolutely unnecessary. To understand it better, entrepreneurs must make their spending decisions purely based on how grounded the needs are – without getting influenced by unwarranted enthusiasm. Not all attractive and reasonable items may make the lives of humans and businesses better.
The simple and pragmatic way to understand and practice this ROI exercise is evaluating whether you are getting your money’s worth during your spending. Following are a few thoughts that you can keep in mind for doing this ROI exercise for a specific spending item.
· Track all your spending patterns – expenditure may be more or even less at different situations/market demands
· List all revenues specific to the item
· Track intangible costs and value generation
· Compare the margin between the item cost and revue/value generated
Besides helping you determine more profitability and value of spending, ROI exercise can make you feel more comfortable and confidence while making future investment plans.