Return on investment (ROI), is usually abbreviated as ROI, this is a concept that investors in particular will ask for when they are looking for an investment when you talk to them. But what does this actually mean? What does it consist of, how can you calculate the ROI and what exactly do investors expect? On this page we will discuss the features, advantages and disadvantages of this return on investment calculation.
Calculate return on investment
Return on investment literally means "return on investment" and that actually says exactly what it stands for. If people ask for your ROI, they want to know what the return is on (previous) investments. If the investment yields a loss, the ROI is a negative number; if the investment yields a profit, the ROI is a positive number.
Return on investment (ROI) = (Expected) return / Investment (costs) × 100%
Advantage of ROI
The advantage of calculating the ROI is that you can see at a glance whether an investment is worth considering or not. Investors prefer not to pull on a dead horse, so 99 out of 100 will not invest money if the ROI of a project, product or service is negative. Also useful is that the investor can quickly and easily compare the ROI of your company with other potential investment projects.
Downside of ROI
A major disadvantage of ROI is that the number does not take into account the risk that such an investment can entail. The risks of the business figures are calculated with other key figures, such as liquidity and solvency. With these key figures you can calculate whether the investment will actually be repaid. You, both the entrepreneur and the investor, must of course also take into account all kinds of other factors, such as the payback period and the business situation.
Calculate payback period
If you are in conversation with an investor and it turns out that the desired investment is high, you would do well to calculate a payback period. For example, if someone invests 100,000 euros in your company and your company is worth a maximum of 3x that amount, the investment seems very large. But if you show an example where the monthly turnover increases with the aforementioned investment 5000 euros, then the payback period (ROI) (100,000 / 5,000) is twenty months. In other words, you have earned back his investment after less than two years. Then the investment sounds like smaller. Investors almost always calculate a payback period for themselves. An example calculation can help him with this.
Ideal return on investment
What is a good ROI differs per industry or the phase a company is in. For example, investors with a new company expect an average ROI of between 15 and 20 percent. The ROI will be lower in slow-growing companies. In addition, it differs per investor. For example, an aunt or uncle who helps a nephew with some venture capital so that he can start his own business, will do so mainly because the favor factor is high. The return is then less important. With crowdfunding it is a bit fifty-fifty. It depends enormously on the platform and type of project. Sometimes the return is decisive, but just as often it is about the goodwill factor.
On the other hand, if you take out an anonymous loan to improve your working capital or if you turn to a large investment company because you want to make a big step with an existing company, then the goodwill factor still plays a role, but the papers and returns have to be they really want to do business with you 100% in order.
Perhaps talking to other entrepreneurs who are roughly in the same boat as you can help you figure out what ROIs their investors expected.
[caption id="attachment_349564" align="aligncenter" width="216"] Adriaan Smit founder and CEO of Sunlife Real Estate[/caption]
Would you like more information about return on investment on Curacao? please contact me at Adriaan@sunlife-wp.devshs.com
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Adriaan Smit founder and CEO of Sunlife Real Estate[/caption]
